A Company Is Considering Purchasing an Asset for $50,000 That

question 26

Essay

A company is considering purchasing an asset for $50,000 that would have a useful life of 8 years and would have a salvage value of $7,000. For tax purposes, the entire original cost of the asset would be depreciated over 8 years using the straight-line method and the salvage value would be ignored. The asset would generate annual net cash inflows of $18,000 throughout its useful life. The project would require additional working capital of $2,000, which would be released at the end of the project. The company's tax rate is 30% and its discount rate is 15%.
Required:
What is the net present value of the asset?

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Definitions:

Ocean Province

A broad region within an ocean characterized by specific oceanographic or ecological features.

Neritic

Relating to the shallow part of the sea near a coast and overlying the continental shelf, characterized by abundant marine life.

Intertidal Zone

The coastal area that is exposed to the air at low tide and submerged at high tide.

High Tide

High tide is the state of the tide when the water reaches its highest level.