Charlotte Computer Services is considering purchasing equipment at $100 000. It is anticipated the equipment will have a useful life of five years. It will be depreciated on a straight-line basis. Operating revenue is expected to be $74 000 per annum and operating expenses $25 000 per annum. The equipment is subject to an investment allowance of 10 per cent and the tax rate is 30 per cent. The after-tax hurdle rate is 12 per cent. What is the net present value of the investment?

A) $45 282
B) $7545
C) $70 825
D) $48 282

Question

Khalidah Wazir · Accepted Answer

Final Answer : D, Explanation :  The net present value (NPV) of the investment can be calculated by considering the initial investment, the annual net cash flows, the investment allowance, and the tax implications. The calculation involves determining the annual depreciation, adjusting the net operating income for taxes, and then discounting those cash flows back to their present value at the after-tax hurdle rate. The correct NPV, based on the provided information and the correct application of the NPV formula, is $48,282.

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