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I got confused regarding what cash-flow I should take while calculating NPV. Like in some questions we take cash-flow(before tax)like in below example 1 and in some cases we are taking after-tax. So how do I know if I have to take before tax/after tax cashflow. Thanks
Example1:12. Question ID: CMA 1295 4.12 (adapted) (Topic: Net Present Value Method)
Willis Inc. has a cost of capital of 15% and is considering the acquisition of a new machine which costs $400,000 and has a useful life of 5 years. Willis projects that earnings and cash flow will increase as follows:
Net Year After-Tax
Cash Flow 1 $100,000 $160,000 2 100,000 140,000 3 100,000 100,000 4 100,000 100,000 5 200,000 100,000
Example2: its taking after tax cash flow in calculating NPV
Question ID: ICMA 10.P2.323 (Topic: Net Present Value Method)
Lunar Inc. is considering the purchase of a machine for $500,000 which will last 5 years. A financial analysis is being developed using the following information.
Year 1 Year 2 Year 3 Year 4 Year 5 Unit sales 10,000 10,000 20,000 20,000 20,000 Selling price per unit $ 100 $ 100 $ 100 $ 100 $ 100 Variable cost per unit 65 65 65 65 65 Fixed costs 300,000 300,000 300,000 300,000 300,000 Pre-tax cash flow 50,000 50,000 400,000 400,000 400,000
The machine will be depreciated over 5 years on a straight-line basis for tax purposes and Lunar is subject to a 40% effective income tax rate. Assuming Lunar will have significant taxable income from other lines of business, and using a 20% discount rate, the net present value of the project would be
- This topic was modified 1 week, 6 days ago by Lynn Roden. Reason: Corrected HTML in Visual view
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