Use the information for the question(s) below.
Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects:
$\begin{array}{lrrr}
\hline\text { Year }&0&1&2&3\
\hline \text { Sales (Revenues) } && 100,000 & 100,000 & 100,000 \
\hline \text { - Cost of Goods Sold (50\% of Sales) } && 50,000 & 50,000 & 50,000 \
\hline \text { - Depreciation } && 30,000 & 30,000 & 30,000 \
\hline \text { = EBIT } && 20,000 & 20,000 & 20,000 \
\hline \text { - Taxes }(30 \%) && 6000 & 6000 & 6000 \
\hline \text { = unlevered net income } && 14,000 & 14,000 & 14,000 \
\hline \text { + Depreciation } && 30,000 & 30,000 & 30,000 \
\hline+ \text { changes to working capital } && -5000 & -5000 & 10,000 \
\hline \text { - capital expenditures } & -90,000\
\hline
\end{array}$
-The net present value (NPV) for Epiphany's Project is closest to:

Question

Quizplus · Accepted Answer

The correct answer is A because the NPV is calculated as the sum of the present values of the incremental cash flows over the project's life. The present value of each cash flow is calculated by multiplying the cash flow by the discount factor, which is the present value of $1 received at the end of the period. The discount factor is calculated as 1 / (1 + r)^n, where r is the cost of capital and n is the number of periods. The NPV is then calculated as the sum of the present values of the incremental cash flows. In this case, the NPV is calculated as follows:NPV = -90,000 + (14,000 / (1 + 0.12)^1) + (14,000 / (1 + 0.12)^2) + (14,000 + 30,000 + 10,000) / (1 + 0.12)^3= -90,000 + 12,500 + 11,161 + 39,000= $14,348

Use the Information for the Question(s) Below -The Net Present Value (NPV) for Epiphany's Project Is Closest