# 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?

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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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