Question

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

After-tax discount rate		11	%
Tax rate		30	%
Expected life of the project		4
Investment required in equipment	$	160,000
Salvage value of equipment	$	0
Annual sales	$	350,000
Annual cash operating expenses	$	245,000

The company uses straight-line depreciation on all equipment; the annual depreciation expense will be $40,000. 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 present value of the project is closest to:

Multiple Choice

• $79,592

• $182,000

• $265,307

• $105,307

Answer 1

Answer : Option - D,  $105,307

Solution : Calculation of the net present value of the project

Net present value = Present value of Cash inflow - Initial cash outflow

Net Income before tax = Annual sales - Annual cash operating expenses - Depreciation

= $350,000 - $245,000 - $40,000

= $65,000

Net Income after tax = Net Income before tax - (Net Income before tax X Tax rate)

= $65,000 - ($65,000 X 30%)

= $65,000 - $19,500

= $45,500

Cash inflow = Net Income after tax + Depreciation

= $45,500 + $40,000

= $85,500

Present value of Cash inflow = Cash inflow X Present value annuity factor (11%, 4years)

= $85,500 X 3.102446

= $265,259.133

Initial cash outflow = $160,000

Net present value = $265,259.133 - $160,000

= $105,259.133

The net present value of the project is closest to $105,307 is $105,259.133