Decelle Corporation is considering a capital budgeting project that would require investing $80,000 in equipment with an expected life of 4 years and zero salvage value. Annual incremental sales would be $260,000 and annual incremental cash operating expenses would be $210,000. The project would also require an immediate investment in working capital of $20,000 which would be released for use elsewhere at the end of the project. The project would also require a one-time renovation cost of $20,000 in year 3. The company's income tax rate is 30% and its after-tax discount rate is 12%. The company uses straight-line depreciation. 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 the tables provided.The net present value of the entire project is closest to:

Question

Quizplus · Accepted Answer

1) Calculate the annual cash flow:
Annual Sales - Cash Operating Expenses - Depreciation = Annual Cash Flow
$260,000 - $210,000 - ($80,000/4) = $30,000
2) Calculate the renovation cost present value:
$20,000 / (1+0.12)^3 = $13,884
3) Calculate the present value of annual cash flow:
$30,000 / (0.12) [using the PV of Annuity table in Exhibit 14B-1] = $186,131
4) Calculate the present value of investment:
($80,000 + $20,000) / (1+0.12) + $13,884 = $103,218
5) Calculate the net present value:
$186,131 - $103,218 = $82,913
6) Calculate the after-tax net present value:
$82,913 * (1-0.30) = $58,039
Thus, the net present value of the entire project is closest to $27,310.

Decelle Corporation Is Considering a Capital Budgeting Project That Would