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 |

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Garrison 16e updates 05-17-2018, 06-15-2018
Multiple Choice
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