Schweinsberg Corporation is considering a capital budgeting project. The project would require an investment of $120,000 in equipment with a 4 year expected life and zero salvage value. The company uses straight-line depreciation and the annual depreciation expense will be $30,000. Annual incremental sales would be $230,000 and annual incremental cash operating expenses would be $180,000. The company's income tax rate is 30% and the after-tax discount rate is 15%. The company takes income taxes into account in its capital budgeting.Assume cash flows occur at the end of the year except for the initial investments.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:

Question

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The net present value (NPV) of the project can be calculated by determining the annual net cash flows and then discounting these cash flows back to their present value using the after-tax discount rate of 15%.1. Calculate the annual depreciation expense:- The equipment costs $120,000 and has a 4-year life with zero salvage value, so the annual depreciation expense is $120,000 / 4 = $30,000.2. Calculate the annual incremental net income before taxes:- Incremental sales are $230,000 and incremental cash operating expenses are $180,000, so the incremental net income before depreciation and taxes is $230,000 - $180,000 = $50,000.- Subtract the depreciation expense to get the net income before taxes: $50,000 - $30,000 = $20,000.3. Calculate the tax on the incremental net income:- The tax rate is 30%, so the tax on the net income is $20,000 * 30% = $6,000.4. Calculate the after-tax net income:- Subtract the tax from the net income before taxes: $20,000 - $6,000 = $14,000.5. Calculate the annual net cash flows:- Add back the depreciation expense (since it's a non-cash charge) to the after-tax net income: $14,000 + $30,000 = $44,000.6. Calculate the NPV:- The annual net cash flow is $44,000 for 4 years. Using the discount factor for 15% over 4 years (the sum of the discount factors for years 1 through 4 from the table, which is approximately 2.855), the present value of these cash flows is $44,000 * 2.855 = $125,620.- Subtract the initial investment of $120,000 from this amount to get the NPV: $125,620 - $120,000 = $5,620.The closest answer provided is D) $5,664, acknowledging a slight difference due to rounding or the exact discount factor used.

Schweinsberg Corporation Is Considering a Capital Budgeting Project