archived_user
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- Jun 18, 2026
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I have included the questions below for reference.
1) FITCO is considering the purchase of new equipment. The equipment costs $350,000, and an additional $110,000 is needed to install it. The equipment will be depreciated straight-line to zero over a five-year life. The equipment will generate additional annual revenues of $265,000, and it will have annual cash operating expenses of $83,000. The equipment will be sold for $85,000 after five years. An inventory investment of $73,000 is required during the life of the investment. FITCO is in the 40 percent tax bracket and its cost of capital is 10 percent. What is the project NPV?
Answer C = 97,449. Agreed. Notice there would not be a BV as equipment has depreciated fully.
2) After estimating a project’s NPV, the analyst is advised that the fixed capital outlay will be revised upward by $100,000. The fixed capital outlay is depre- ciated straight-line over an eight-year life. The tax rate is 40 percent and the required rate of return is 10 percent. No changes in cash operating revenues, cash operating expenses, or salvage value are expected. What is the effect on the project NPV?
Answer B = $73,325 decrease.
Disagree. This only takes into consideration the depreciation change. However, the problem depreciates the FCInv at 8 years, which means that at year 5 when it is sold, it would still have a book value. Maybe I don’t get it, but it appears to me that question #2 does not take into consideration the tax savings the FCInv would generate by selling the equipment at a loss [85k - (85k - 210k)(.40)]
The answer in the book only adjusts for depreciation and its effects on NPV. The problem clearly states that the project still has 5 years of CF and doesn’t say the equipement is sold at year 8 instead of year 5. It only says FCInv increased by 100k and is depreciated by 8 years instead of 5. So wouldn’t FCInv would still have BV, therefore it needs to be included in TNOCF?
How is this not considered? Any help would be greatly appreciated.
1) FITCO is considering the purchase of new equipment. The equipment costs $350,000, and an additional $110,000 is needed to install it. The equipment will be depreciated straight-line to zero over a five-year life. The equipment will generate additional annual revenues of $265,000, and it will have annual cash operating expenses of $83,000. The equipment will be sold for $85,000 after five years. An inventory investment of $73,000 is required during the life of the investment. FITCO is in the 40 percent tax bracket and its cost of capital is 10 percent. What is the project NPV?
Answer C = 97,449. Agreed. Notice there would not be a BV as equipment has depreciated fully.
2) After estimating a project’s NPV, the analyst is advised that the fixed capital outlay will be revised upward by $100,000. The fixed capital outlay is depre- ciated straight-line over an eight-year life. The tax rate is 40 percent and the required rate of return is 10 percent. No changes in cash operating revenues, cash operating expenses, or salvage value are expected. What is the effect on the project NPV?
Answer B = $73,325 decrease.
Disagree. This only takes into consideration the depreciation change. However, the problem depreciates the FCInv at 8 years, which means that at year 5 when it is sold, it would still have a book value. Maybe I don’t get it, but it appears to me that question #2 does not take into consideration the tax savings the FCInv would generate by selling the equipment at a loss [85k - (85k - 210k)(.40)]
The answer in the book only adjusts for depreciation and its effects on NPV. The problem clearly states that the project still has 5 years of CF and doesn’t say the equipement is sold at year 8 instead of year 5. It only says FCInv increased by 100k and is depreciated by 8 years instead of 5. So wouldn’t FCInv would still have BV, therefore it needs to be included in TNOCF?
How is this not considered? Any help would be greatly appreciated.