Jennings Creations is considering an investment in a computer that is capable of producing various images that are useful in the production of commercial art. The computer would cost $20,000 and have an expected life of eight years. The computer is expected to generate additional annual net cash receipts (before-tax) of $6,000 per year. The computer will be depreciated according to the
straight-line method and the firm's marginal tax rate is 25 percent. Refer to Jennings Creations. What is the after-tax net present value of the proposed project (using a 16 percent discount rate)? Present value tables or a financial calculator are required.
a. $2,261
b. $(454)
c. $6,062
d. $(4,797)
A
Use PV of Annuity Table 16%, 8 years; Constant = 4.3436
After-tax inflows =$5,125 * 4.3436 = $ 22,261
$22,261 - $20,000 = $2,261
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