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Jameson Corporation is considering investing $500,000 in new computers for its main office building. The initial investment will require an increase in working capital of $20,000, which will then be released at the end of the investment period. The new computers are expected to increase Jameson's contribution margin by $90,000 each year. The life of the project is expected to be 10 years, at which point Jameson will be able to sell the computers at their salvage value for $10,000. Assume Jameson uses a 10% discount rate

1) Using the information above and ignoring the effect of taxes, calculate the net present value (NPV) of the investment. Assume its current computers have no salvage value and are unable to be sold.

2) Assume that Jameson uses straight line depreciation, depreciates assets down to zero for tax purposes, and has a tax rate of 30%. Calculate the yearly depreciation tax shield.

3) Using the same facts as above, including the effect of taxes, calculate the present values of both the annual increase in contribution margin and the proceeds from selling the computers. (Show the present value of each separately.)

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M9960170

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