MANAGERIAL ACCOUNTING F/MGRS.
MANAGERIAL ACCOUNTING F/MGRS.
5th Edition
ISBN: 9781259969485
Author: Noreen
Publisher: RENT MCG
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Chapter 7C, Problem 7C.1E
To determine

Concept Introduction:

The net present value if the net value of a project in today’s worth. The net present value of a project is the difference between the present value of future cash inflows and the present value of future cash outflows.

The net present value of the investment.

Expert Solution & Answer
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Answer to Problem 7C.1E

The net present value of the investment is $145,511.

Explanation of Solution

The net present value of the investment is calculated as follows:

    Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
    Initial investment (I) $ (2,000,000)
    Net operating income (A) $ 300,000 $ 300,000 $ 300,000 $ 300,000 $ 300,000
    Income tax (B) = (A*30%) $ 90,000 $ 90,000 $ 90,000 $ 90,000 $ 90,000
    Income after tax (C) = (A-B) $ 210,000 $ 210,000 $ 210,000 $ 210,000 $ 210,000
    Depreciation (D) $ 400,000 $ 400,000 $ 400,000 $ 400,000 $ 400,000
    Cash inflows after tax (E) = (C+D) $ 610,000 $ 610,000 $ 610,000 $ 610,000 $ 610,000
    Net cash flows (F) = (I+E) $ (2,000,000) $ 610,000 $ 610,000 $ 610,000 $ 610,000 $ 610,000
    PV of $ 1(13%) (G) 1.00000 0.88496 0.78315 0.69305 0.61332 0.54276
    PV = F*G $ (2,000,000) $ 539,823 $ 477,719 $ 422,761 $ 374,124 $ 331,084
    Net present value (Sum of PVs)$ 145,511

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