The following information concerning a proposed capital budgeting project has been provided by Jochum Corporation:Click here to viewExhibit 14B-1 to determine the appropriate discount factor(s) using tables. The expected life of the project is 4 years. The income tax rate is 30%. The after-tax discount rate is 12%. The company uses straight-line depreciation on all equipment and the annual depreciation expense would be $54,000. 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.The net present value of the project is closest to: (Round intermediate calculations and final answer to the nearest dollar amount.)

Question

The following information concerning a proposed capital budgeting project has been provided by Jochum Corporation:Click here to viewExhibit 14B-1 to determine the appropriate discount factor(s) using tables.  The expected life of the project is 4 years. The income tax rate is 30%. The after-tax discount rate is 12%. The company uses straight-line depreciation on all equipment and the annual depreciation expense would be $54,000. 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.The net present value of the project is closest to: (Round intermediate calculations and final answer to the nearest dollar amount.)

Quizplus · Accepted Answer

To calculate the net present value of the project, we need to calculate the present value of all cash inflows and outflows.

Year 0:
Initial investment = -$480,000

Year 1:
Cash inflow = $188,000
Depreciation = $54,000
Taxable income = $134,000
Tax expense = -$40,200
After-tax cash inflow = $147,800
Present value of after-tax cash inflow = $132,143

Year 2:
Cash inflow = $225,000
Depreciation = $54,000
Taxable income = $171,000
Tax expense = -$51,300
After-tax cash inflow = $173,700
Present value of after-tax cash inflow = $142,453

Year 3:
Cash inflow = $272,000
Depreciation = $54,000
Taxable income = $218,000
Tax expense = -$65,400
After-tax cash inflow = $206,600
Present value of after-tax cash inflow = $153,782

Year 4:
Cash inflow = $316,000
Depreciation = $54,000
Taxable income = $262,000
Tax expense = -$78,600
After-tax cash inflow = $237,400
Present value of after-tax cash inflow = $162,093

To calculate the net present value, we add up the present values of all cash inflows and outflows:
NPV = Present value of cash inflows - Initial investment
NPV = $132,143 + $142,453 + $153,782 + $162,093 - $480,000
NPV = $110,471

Since the NPV is positive, accepting the project would increase the value of the company. The closest answer is C) $180,471.

The Following Information Concerning a Proposed Capital Budgeting Project Has