The method of depreciation (straight line versus accelerated…
The method of depreciation (straight line versus accelerated) used for long-term fixed assets is important in cash flow valuation because accelerated depreciation produces higher total after-tax cash flows for the entire life of the asset.
Read DetailsA client has asked your advice on the acquisition of equipme…
A client has asked your advice on the acquisition of equipment for a new business endeavor. Alternative A costs $1,200,000 and has annual maintenance expenses of $60,000. Alternative B is a more advanced machine costing $1,700,000. This machine will have maintenance expenses of $40,000 per year and will also lower production costs by $80,000 per year. Both machines have a 5-year life, straight-line depreciation and zero salvage value. The company’s cost of capital is 10% and tax rate is 35%. Which machine should the client purchase and how much more value is added by choosing this alternative? (i.e. what is the difference in NPV between the two alternatives).
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