Chicago Value Company Case

Topics: Net present value, Investment, Capital budgeting Pages: 4 (1136 words) Published: March 10, 2007
1.Explain the inputs into 1) the net initial investment outlay at year 0, the initial investment $200,000 which include taxes and delivery, and the cost to install the equipment $12,500. The total net cost $212,500. 2) The depreciation tax savings in each year of the projects economic life, this will show how much the tax savings will be depreciated each year using the MACRS method 3) the projects incremental cash flows? This shows the company profit for each of the eight years. Net CostMACRS Tax RateDepreciation Tax Savings

$ 212,500 0.20 $ 42,500 40% $ 17,000 $ 212,500 0.32 $ 68,000 40% $ 27,200 $ 212,500 0.19 $ 40,375 40% $ 16,150 $ 212,500 0.12 $ 25,500 40% $ 10,200 $ 212,500 0.11 $ 23,375 40% $ 9,350 $ 212,500 0.06 $ 12,750 40% $ 5,100

2.What is the project's NPV? The Net Present Value is $36,955.09 Explain the economic rationale behind the NPV. Economists found much of their analyses on a marketplace where supply and demand are based on the perceptions of present value and scarcity. The Net Present Value (NPV) are calculations used to estimate the value over a lifetime which in this case would be of Chicago Valve's standard petroleum valve systems. NPV allows decision makers to compare various alternatives on a similar time scale by converting all options to current dollar figures. Could the NPV of this particular project be different for Lone Star Petroleum Company than for one of Chicago Valve's other potential customers? A project is deemed acceptable if the net present value is positive over the expected lifetime of the project.

Project Net Cash Flows
Year Net CostDepreciation Tax SavingAfter-Tax Cost SavingsNet Cash Flow 0-212,500 -212,500
1 170003600053000
2 272003600063200
3 161503600052150
4 102003600046200
5 93503600045350
6 51003600041100
7 0...
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