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could you please explain how to solve the following question. the answer is $181,500.
juicy co is considering investing in a new industrial juicer for use in a new contract. it will cost $150,000 and will last 2 years. juicy co pays corporation tax of 30% (as the cashflows occur) and due to the health benefits of juicing the machine attracts 100% of tax allowable depreciation immediately.
given the cost of capital is 10% what is the minimum value of pre-tax revenue receivable in two-years which would be required to cover the net cost of the juicer.I have been able to calculate the net cost of the juicer as $105,000 (150,000-45,000) but do not understand how to the value of pre-tax receivable.
The minimum value of the revenue will be whatever makes the NPV of the project equal to zero.
If the pre-tax revenue is X, then there will be tax payable of 0.3X, and so the net cash inflow will be X – 0.3X = 0.7X.
The PV of the inflow will therefore be 0.7X x (2 year discount factor at 10%), and this must be equal to $105,000. You can then divide in order to calculate X.
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