Reference no: EM132173181

Question - The Company 2020 inc. plans to purchase a new paint compressor. This compressor is currently selling (at a discount) $ 50,000. It would save the company money approximately $ 18,000 at the end of each year, since the painting work is currently executed on a fee-for-service basis outside the company. Annual fees directly related the new compressor would be $ 8,000, while the cancellation of the contract would result in a cost for breach of contract of $ 7,000 at the end of the next year. From the point of view this amount of $ 7,000 would be recognized as an operating expense. The company's annual output would be 800 units with the use of the new compressor, whereas it would be only 700 units by continuing to apply the package method. The price sold per unit is $ 25. (Suppose these amounts are achievable at the end of each year.)

The assessment horizon is 4 years, at the end of which the compressor is expected to sells $ 60,000 (there is no class closure).

The company requires a 12% rate of return on this type of project, it has a tax rate 35% and the declining balance rate concerned is 20%. Finally, only 50% of the capital gain is taxable.

a) Determine the value of the investment at the beginning of the project.

b) Estimate the present value of the cash flows during the project.

c) Evaluate the current value of cash inflows and outflows at the end of the project.

d) Calculate the NPV of the project and say if it is interesting.

e) Give the value of the tax savings due to depreciation for the second year.