Posted: February 20th, 2017

Again assuming that the company faces a 18% tax rate, calculate the NPV of the project under an inflation rate of 4.5%.12

Teck Lee Transport Project Evaluations (Individual)        Source: Cost Accounting 15e, Horngren, Pearson, 2015. Teck Lee Transport (TLT) is considering replacing all 5 of its vehicles with new ones. The old vehicles are fully depreciated and have no disposal value. The new vehicles cost $900,000 (in total). Because the new vehicles are more efficient than the old vehicles, TLT will have annual incremental cash savings from using the new vehicles in the amount of $198,500 per year. The vehicles have a 7 year useful life and no terminal disposal value and are depreciated using the straight-line method. TLT requires a 9% real rate of return.7    Given the preceding information, what is the net present value of the project? Ignore taxes.8    Assume the $198,500 cost savings are in current real dollars and the inflation rate is 4.5%. Recalculate the NPV of the project.9    Based on your answers to requirements 1 and 2, should TLT buy the new cash registers?10    Now assume that the company’s tax rate is 18%. Calculate the NPV of the project assuming no inflation.11    Again assuming that the company faces a 18% tax rate, calculate the NPV of the project under an inflation rate of 4.5%.12    Based on your answers to requirements 4 and 5, should TLT buy the new vehicles?