Can you explain step by step how to calculate the NPV for both the investments options given below.
Nittany Co. is considering purchasing one of the two different machines for their factory. Both machines would be used to introduce a new product to Nittany's already diversified product line. There is, however, great disagreement among management as to which of the projects should be invested in by Nittany. There are only enough funds for one of the following projects to be invested in. You have been hired as a consultant to assist management in making a decision as to which of these two machines should be purchased.
Information about the 2 machines is below:
Investment in Working Capital at the beginning of the project & $4,000 at the end of the year 4
* In the calculation of tax depreciation expense, the salvage value of the machine is not taken into account and the entire initial cost of the asset will be depreciated over the useful life of the asset.
The cost of capital for Nittany is 10% and Nittany generally does not invest in any project that does not return at least 12%. Nittany's tax rate is 30%.
Could you check my calculation attached.
Head of Accounting Dept.&Deputy Admin Manager
Mob.: +966 59 016 2368 & +201023776570
Stefan Auer Shading Structures Company
P. O. Box 10680, Jeddah 21443, KSA, Tel: +96612 606-4663, www.sae-saudi.com
Legal Disclaimer : The information in this message is confidential and may be legally privileged. It is intended solely for the addressee. Access to this message by anyone else is unauthorized. If you are not the intended recipient, any disclosure, copying, or distribution of the message, or any action or omission taken by you in reliance on it, is prohibited and may be unlawful. Please immediately contact the sender if you have received this message in error.
Why we are not considering salvage value at the end of useful life?. In this question they directly given salvage value and we consider it as last years salvage value.
For depreciation calculation we are not deducting any salvage value , that means there is no book value at the end of the life. So salvage value given in this question is completely taken as gain on sale [(Salvage value - BV)*.70]. That means I think in last years we need to add after tax salvage value in our calculation.
Institute of Management Accountants
10 Paragon Drive, Suite 1
Montvale, New Jersey 07645-1760 USA
(800) 638-4427 or +1 (201) 573-9000
CMA Certification CSCA Credential Membership Education Center Career Resources Research & Publications Events