# Calculate the net present value of each investment

Northrop Corporation is trying to decide whether to make the following two investments: The first is a piece of equipment that costs \$40,000 but will save the company \$9,000 after taxes (including the tax shield) in each year of its 10-year life. The second is a patent that costs \$60,000 but will generate \$9,400 in after-tax cash flows (including the tax shield) over its 17-year life. Northrop’s cost of capital is 15 percent.

Calculate the net present value of each investment. Should the company acquire one, both, or neither investment?

In 2011, Hoffman Corporation is considering investing in a new five-year project that will require an initial cash outlay of \$650,000. When the project is undertaken, Hoffman will sell old equipment with an initial cost of \$400,000 and accumulated depreciation of \$275,000 for \$50,000 cash. Hoffman management anticipates that the new project will generate \$280,000 of cash revenue and require \$88,000 of cash expenses in each of the five years. Depreciation associated with the project is calculated uniformly. Hoffman has an 11 percent cost of capital and a 30 percent tax rate.

Calculate the project’s net present value. Should Hoffman undertake the project? Why?

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