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Depreciation allows you to treat a portion of a capital cost as an expense in future years of a project

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You are leading a business and you are told that you can sell a new product and increase the revenue Show more You are leading a business and you are told that you can sell a new product and increase the revenue of the business by $100000/yr. The operating costs will increase by $50000/yr and you will spend $20000 in capital to manufacture the new product. The capital is depreciable (straight line) over the same 5 years. The tax rate is 40% and the interest rate (cost of capital) is 10%. Now answer the questions in 1-5. 1. What is the annual increase in before tax cash flow ? 2. What are the additional annual taxes the business will pay due to this investment ? 3. What is the NPV of the investment ? 4. What is the approximate undiscounted payback period (in months) ? 5. Depreciation allows you to treat a portion of a capital cost as an expense in future years of a project. It therefore improves your cash flow by decreasing your taxable income. True False Show less

 
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