Net Present Value Computation Case Study

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Question 1

Net present value computation is a financial budgeting technique used to enable assessment of proposed investments. It is alternatively referred to as the discounted cash flow technique. Specifically, it refers to the difference between the present value cash outflows and that of cash inflows that would result from making a given investment. This investment could be an expansion or purchase of a new plant, purchase of new machinery and addition of assets. In order to accept or reject a proposed investment, its net present value (NPV) is taken into consideration (Jackson, Sawyers & Jenkins, 2013).
When computed, NPV obtained is usually a positive value, zero or a negative value. Positive NPV is whereby the present value of cash
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In this question, one of the fundamental concepts encountered is known as tax shield. This is whereby the taxable income for a company, corporation or individual is reduced by claiming allowable deductions like depreciation, charitable donations and mortgage interest. It is a strategy that ameliorates the value of a business entity as it reduces the tax liability of the entity.

Tax shield on depreciation is considered a cash inflow despite the absence of cash being physically received. This is because it is a form of saving stemming from proper asset management in order to save by lowering the tax bill. Depending on the method of calculating asset depreciation used, the net present value of an investment will vary (Shrieves, 2001). In our question, the technique considered is the straight-line method (Shrieves,
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It is not only easy to compute, but also is very convenient when the pattern to how an asset has been used is unclear. If a salvage value of an asset is given at the end of its useful life, this amount is excluded in the calculations of tax allowances, meaning that the salvage value is subject to tax. In such a case, however, the salvage value is still considered a cash inflow because eventually, it is money received by the business after asset disposal. This value is usually first taxed, and then its present value is computed. The present value of the salvage value is then summed up to the equation and thus we are able to determine the NPV of the
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