Question

# Rapozo Corporation has provided the following information concerning a capital budgeting project: Investment required in equipment...

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- 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

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