Question

Rapozo Corporation has provided the following information concerning a capital budgeting project:

Investment required in equipment	$	492,000
Net annual operating cash inflow	$	248,000
Tax rate		30	%
After-tax discount rate		7	%

The expected life of the project and the equipment is 3 years and the equipment has zero salvage value. The company uses straight-line depreciation on all equipment and the depreciation expense on the equipment would be $164,000 per year. 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 annual operating cash inflow is the difference between the incremental sales revenue and incremental cash operating expenses.

Click here to view Exhibit 13B-1 to determine the appropriate discount factor(s) using table.

Required:

Determine the net present value of the project. (Round intermediate calculations and final answer to the nearest dollar amount.)

Answer 1

Answer- The net present value of the project = $92627.

Explanation-Net present value = Present value of cash inflows – Total outflows

= {(Net annual operating cash inflows- Income tax expense)* Discount factor}- Total outflows

= {($248000-$25200)*2.624}-$492000

= $584627 -$492000

= $92627

Where-

Calculation of Annual Tax Expense
Particulars	Year 1	Year 2	Year 3
	$	$	$
Net annual opearting cash inflow	248000	248000	248000
Less- Depreciation expense	164000	164000	164000
Incremental net income (a)	84000	84000	84000
Tax rate (b)	30%	30%	30%
Income tax expense (c=a*b) $	25200	25200	25200