Chapter 10, Problem 11PROB

Summary Introduction

Net present value:

Net present value is the difference between the present values of cash inflows minus present value of cash outflows.

Calculate the cost of retained earnings are as follows:

$\text{Net present value}=\text{Present value of cash inflows}-\text{Initial investment}$

Decision rule:

$\begin{array}{l}\text{NPV}>\text{0 Accept the project}\\ \text{NPV}<\text{0 Reject the project}\end{array}$

RR is determining to purchase an asset which has cost of $432,000 and installation cost of $52,000. Asset is classified under three years MACRS class and can be sold after three years for $220,000. Savings from the machine is $185,000 and working capital requires is $22,000. Life of the project is 3 years, tax rate is 40% and required rate of return is 14%.