FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Question

How do I create an After tax Cash Flow Analysis?  Use rounded answers for subsequent calculations 

Net Present Value Analysis Champion Company is considering a contract that would require an expansion of its food processing capabilities. The contract covers five years. To provide the required products, Champion would have to purchase additional equipment for $64,000. Champion estimates the contract will provide annual net cash inflows (before taxes) of $26,000. For tax purposes, the equipment will be depreciated as follows: Year 1 $8.000 Year 2 16,000 Year 3 16.000 Year 4 16.000 Year 5 8.000 Although salvage value is ignored in the tax depreciation calculations, Champion estimates the equipment will be sold for $8,000 after five years. Assuming a 35% income tax rate and a 10% hurdle rate, compute the net present value of this contract proposal. Using net present value analysis, should Champion accept the contract? Round answers to the nearest whole number. Use rounded answers for subsequent calculations. Use a negative sign with net present value to indicate a negative amount. Otherwise do not use negative signs with your answers. After-Tax Cash Flow Analysis Amount Present Value After-tax cash inflows for S years Tax savings from depreciation Year 1 Year 2 Year 3 Year 4 Year 5 After-tax equipment sale proceeds Total present value of future ash flows Investment required in equipment Net positive (negative) present value Should Champion accept the contract?
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Transcribed Image Text:Net Present Value Analysis Champion Company is considering a contract that would require an expansion of its food processing capabilities. The contract covers five years. To provide the required products, Champion would have to purchase additional equipment for $64,000. Champion estimates the contract will provide annual net cash inflows (before taxes) of $26,000. For tax purposes, the equipment will be depreciated as follows: Year 1 $8.000 Year 2 16,000 Year 3 16.000 Year 4 16.000 Year 5 8.000 Although salvage value is ignored in the tax depreciation calculations, Champion estimates the equipment will be sold for $8,000 after five years. Assuming a 35% income tax rate and a 10% hurdle rate, compute the net present value of this contract proposal. Using net present value analysis, should Champion accept the contract? Round answers to the nearest whole number. Use rounded answers for subsequent calculations. Use a negative sign with net present value to indicate a negative amount. Otherwise do not use negative signs with your answers. After-Tax Cash Flow Analysis Amount Present Value After-tax cash inflows for S years Tax savings from depreciation Year 1 Year 2 Year 3 Year 4 Year 5 After-tax equipment sale proceeds Total present value of future ash flows Investment required in equipment Net positive (negative) present value Should Champion accept the contract?
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Net present value is the difference between present value of cash inflows and present value of cash outflows from the business. A positive NPV indicates that project should be accepted, otherwise not.

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