Fry Blind Services cleans Venetian and vertical blinds in offices and private homes. They have identified an expensive piece of equipment that will clean all the slats at once and produce significant time savings
The company accountant has prepared the following analysis:
|
Expense Reduction in First Year, in cash
|
|
$307,000
|
|
Additional Taxes Resulting (@ 25%)
|
|
(77,000)
|
|
Annual Depreciation Expense
|
$140,000
|
|
|
Depreciation Tax Shield
|
|
35,000
|
|
Annual Cash Flow
|
|
$265,000
|
|
|
|
|
|
Estimated Life of Equipment
|
5 years
|
|
|
Salvage Value after 5 years
|
$0
|
|
|
Cost of Capital
|
9%
|
|
|
Present Value of Annual Cash Flow
|
|
|
|
($265,000 per year @ 9% for 5 years.)
|
|
$1,030,758
|
|
Cost of the Equipment
|
|
(1,100,000)
|
|
Net Present Value of the Equipment
|
|
mce_markernbsp; (69,242)
|
Dennis Demorgan, the VP of Operations, is not convinced that the analysis is valid. He suggests that, after the first year, because of inflation, the company can expect to reduce its costs by an additional 5% each year.
Rework the analysis, based on Demorgan's assumption.