Project #9859 - Finance

Due 2 hours from now:

 

The CPA practice of Knape, Knape & Knape is considering investing in a complete small business computer system. The initial investment will be $70,000. The computer is in the 5-year MACRS category, and the firm's tax rate is 43%. The computer system is expected to provide additional revenue of $32,000 per year for the next six years, and to reduce expenses by $7,000 per year for the same period.
a) Calculate the net after-tax cash flows from this investment.
b) Calculate the net present value of the system, given that the law firm's weighted average cost of capital is 12%.  Compute IRR in Excel using IRR formula.
c) Should they buy the computer system? 

 

Example below:

 

5-year MACRS category:
20% year 1, 32% year 2, 19.2% year 3, 11.52% year 4, 11.52% year 5, 5.76% year 6

Initial Investment = P = 50,000
Revenue = A = 32,000 + 7,000 = 39,000 (Before Tax Cash Flow -> BTCF)

a) Calculate the net after-tax cash flows from this investment.

I used this equations to get the values in the table:
Depreciation = Initial Investment * MACR Rate
Taxable Income = BTCF - Depreciation
Tax = Taxable Income * Tax Rate
ATCF = BTCF - Tax

uploaded image
b) Calculate the net present value of the system, given that the law firm's weighted average cost of capital is 12%.

NPV = - 50,000 + 29,140 (1+12%)-1 + 31,180 (1+12%)-2 + 29,004 (1+12%)-3 + 27,698.4 (1+12%)-4 + 27,698.4 (1+12%)-5 + 26,719.2 (1+12%)-6
NPV = - 50,000 + 26,017.86 + 24,856.51 + 20,644.47 + 17,602.83 + 15,716.82 + 13,536.78
NPV = 68,375.26

c) Should they buy the computer system?

Yes, they should because the NPV of the computers is above 0, which means that they will win money with the buying.

Subject Business
Due By (Pacific Time) 07/27/2013 03:47 pm
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