Reference no: EM132548829
Gavin Inc. is in need of a computer network for their staff. They receive a proposal as below :
Proposal
Initial after-tax investment in equipment $102,000
Annual cash increase in operations:
Year 1 (before-tax)60,000
Year 2 (before-tax)60,000
Year 3 (before-tax)60,000
Terminal disposal value 0
Estimated life 3 years
The company uses straight-line depreciation for all capital assets. Required rate of return= 14%; tax rate = 30%.
Question 1: What are Annual Cash Flows from Operations and Net Present Value (NPV)?
A.Annual Cash Flows from Operations= $60,000; NPV= $139,320
B.Annual Cash Flows from Operations= $52,200; NPV= $19,208
C.Annual Cash Flows from Operations= $60,000; NPV= $37,300
D.Annual Cash Flows from Operations= $42,000; NPV= -$4,476
Question 2: How long is Payback Period?
A.1.700 years
B.10 years
C.1.954 years
D.2.429 years
Question 3: How much is the Internal Rate of Return (IRR)?
17.8%
11.4%
35.0%
24.9%
Question 4: How would your answers to the above answers change if the terminal disposal value (before tax) of the proposal is $1,000 instead of 0?
A.NVP: increase; Payback period: increase; IRR: increase
B.NPV: decrease; Payback period: no change; IRR: decrease
C.NVP: no change; Payback period: no change; IRR: no change.
D.NPV: increase; Payback period: no change; IRR: increase
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