CMA Study Group

CMA Part 2 - NPV

  • 1.  CMA Part 2 - NPV

    Posted 23 days ago
    Can someone please help me answer this, and explain how to do it.

    Owen Eyewear is planning to purchase a $520,000 computer system to improve the quality and lead time of its eyewear production. Management estimates that this investment will result in increased annual cash revenues of $280,000 with related operating costs of $57,000. The computer system will be depreciated by the Modified Accelerated Cost Recovery System (MACRS) over a five-year life with no salvage value; however, Owen expects to sell the computer system at the end of Year 5 for $70,000. Determine the net present value (NPV) of this investment opportunity.

    Assume a 30% income tax rate and a 12% hurdle rate. Also assume that the asset will be placed in service at the beginning of the fiscal year.

    MACRS Rates: Year 1, 20.0%; Year 2, 32.0%; Year 3, 19.2%; Year 4, 11.52%; Year 5, 11.52%; Year 6, 5.76%

    Bradley Kilbreth
    Manchester NH
    United States

  • 2.  RE: CMA Part 2 - NPV

    Posted 22 days ago
    Present Value  of annual inflows  562,709
    PV of proceeds of computer            27,803
    Less Investment                               520,000
    Net present Value                            70,512

    Annual cash revenue       280,000
    Less operating cost            57,000
    Net                                       223,000
    Multiply PV factor           3.6048  rounded
    TOTAL  before Tax           803,870
    Less tax 30%                    241,161
    After tax                            562,709

    PV of Proceeds

    70,000 x PV .5674=39,718  less tax 11,915 =27,803