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:

Financial Statements

Documents that provide an overview of a company's financial condition, including balance sheets, income statements, and statements of cash flows.

Liquidity

The ability of an asset to be quickly converted into cash with minimal loss of value.

Efficiency

A measure of how effectively resources are used to achieve a goal or perform a process, often with minimal waste or time.

Short-term Obligations

Financial commitments or debts that are due to be paid within one year.