Question

Carlin Company, which uses net present value to analyze Investments, requires a 10% minimum rate of return. A staff assistant recently calculated a $500,000 machine's net present value to be $86,400, excluding the impact of straight-line depreciation
6.105 FV of 1 (i = 100,-5): 1.611
TV of a series of $i cash flows ( - 108, n. 5):
PV of $1 (1 - 108; n = 5) 0.621
PV of a series of $1 cash flown (1 101, n = 5) 3.791 #
If Carlin Ignores income taxes and the machine is expected to have a five-year service life, the correct net present value of the machine would be:
a) $292,700
b) $186,400
c) $86,400

Answer 1

Answer: c) $86,400

Explanation:

Depreciation on an asset reduces the amount of taxes that need to be paid and this is the main reason assets are depreciated.

If Carlin is going to ignore income taxes then there is no need to account for the impact of depreciation on the asset when calculating its present value.

The present value will therefore be the same as the amount calculated by the assistant at $86,400.