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    Net present value for both assets

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    Please help with the following managerial accounting problem. Provide step by step calculations.

    Your company plans to acquire one of two assets. asset a costs $162,500 and has expected annual cash savings of $37,500. asset b cost $225,000 and has expected annual cash savings of $77,500. You'll use the straight-line depreciation for both assets over their estimated useful lives of 5 years, after which both will have a salvage value of zero. Your minimum desired rate of return is 14%, and the present value factor is 3.4331. Ignoring income taxes, calculate the net present value for both assets. Which assets would you advise buying? Why?

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    Solution Preview

    AS we have to ignore income tax, there will be no tax shield on depreciation.

    NPV is a discounted cash flow technique, which explicitly recognize the time value of money. It is defined as the difference between the ...

    Solution Summary

    The following problem helps with capital budgeting. This provides the steps to compute the net present value for both assets. Step by step calculations are given.