Rhoads Corporation is considering a capital budgeting project that would require an investment of $160,000 in equipment with a 4-year expected life and zero salvage value. Annual incremental sales will be $460,000 and annual incremental cash operating expenses will be $330,000. The company's income tax rate is 30% and the after-tax discount rate is 15%. The company uses straight-line depreciation on all equipment; the annual depreciation expense will be $40,000. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting.Click here to view Exhibit 14B-1 to determine the appropriate discount factor(s) using table.The net present value of the project is closest to:
A) $178,252
B) $252,000
C) $97,040
D) $134,168

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV) of the project, we need to calculate the present value of all the cash inflows (incremental sales - incremental cash operating expenses) and subtract the initial investment. 
Year 1:
Cash inflow = $460,000 - $330,000 - $40,000 = $90,000
PV factor = 1/(1+0.15)^1 = 0.8696
Present value of cash inflow = $90,000 x 0.8696 = $78,266.40
Year 2:
Cash inflow = $460,000 - $330,000 - $40,000 = $90,000
PV factor = 1/(1+0.15)^2 = 0.7561
Present value of cash inflow = $90,000 x 0.7561 = $68,048.98
Year 3:
Cash inflow = $460,000 - $330,000 - $40,000 = $90,000
PV factor = 1/(1+0.15)^3 = 0.6575
Present value of cash inflow = $90,000 x 0.6575 = $59,174.28
Year 4:
Cash inflow = $460,000 - $330,000 - $40,000 = $90,000
PV factor = 1/(1+0.15)^4 = 0.5718
Present value of cash inflow = $90,000 x 0.5718 = $51,505.16
Net present value = Present value of cash inflows - Initial investment
NPV = $78,266.40 + $68,048.98 + $59,174.28 + $51,505.16 - $160,000 = $97,040.82

Therefore, the best answer is D.

Rhoads Corporation Is Considering a Capital Budgeting Project That Would