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 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.
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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 ...
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