The given information says
after-tax cash savings will be equal to $27,000. Since it is after-tax, depreciation tax savings are already included in the $27,000.
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Crystal Graham
Director/Manager
Harvest AL
United States
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Original Message:
Sent: 09-09-2021 04:03 AM
From: Kirti Sheth
Subject: Capital Budgeting
Pachyderm Moving is reviewing data related to a new moving truck investment proposal. The new truck will cost $116,000 and have a five-year useful life. Management estimates that at the end of its useful life, the new truck will be sold for $20,000; however, when calculating depreciation the $20,000 is not subtracted from the cost. Therefore, at the end of the five-year life, the truck will have a basis of $0. Pachyderm expects that the annual net after-tax cash savings will be equal to $27,000. Assume an effective tax rate of 50%. Also assume that straight-line depreciation is being used and that Pachyderm's management has set a 9% hurdle rate on similar investments. What is the net present value of the new moving truck?
Ans : (4480)
As per explanation given,
Cash outflow (1,16,000)
Cash Inflow 27,000 * 3.8897 = 105022
(20,000 - 50 %)*.6499 = 6499
Net Present Value = ($116,000) + $105,021 + $6,499 = ($4,480)
cash savings of 27,000 and cash flow from sale has been taken in consideration. why depreciation tax saving hasn't been considered? Can someone please explain
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Kirti Sheth
None
SINGAPORE
Singapore
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