Annala 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 $250,000 and annual incremental cash operating expenses would be $180,000. 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 company's income tax rate is 30% and its after-tax discount rate is 13%. 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

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The net present value (NPV) is calculated by considering the initial investment, annual net cash flows after taxes, and the release of working capital at the end of the project. The annual depreciation is $20,000 ($80,000/4 years). The annual taxable income is $50,000 ($250,000 - $180,000 - $20,000). The tax savings from depreciation is $6,000 ($20,000 * 30%). The annual after-tax cash flow is $56,000 ($70,000 - $14,000). The NPV is calculated using these cash flows and the discount rate of 13%, resulting in an NPV closest to $75,830.

Annala Corporation Is Considering a Capital Budgeting Project That Would