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%



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    Bradley Kilbreth
    Student
    Manchester NH
    United States
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  • 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

    Computation:
    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