Question

Shanks Corporation is considering a capital budgeting project that inolves investiong &600.00 in equipment that would have a useful life of 3 years and zerp salvege value. The company would also need invest $20.000 immediately in working capital which be released for use elesewhere at the end of the project in 3 years. The net annual operationg cash inflow, which in the difference between the incremental sales revenue and incremental cash operationg expenses, would be $300.000 per year. The project would require a one-time renovation expenses of $60.000 at the end of year 2. The company uses straight- line depreciation and the depreciation expenses on the equipment would be $200.000 per year. Assme cash flow occur at the end of the year expect for the initial investment. The company takes income taxes into account in its capital budgetiong. The income tax rate is 35%. The after-tax discount rate is 15%.

Required:

Determine the net present value of the project. Show all your work.

Answer #1

Years | |||||||

0 | 1 | 2 | 3 | NPV | |||

Purchase of equipment | A | -600000 | |||||

Investment in working capital | B | -20000 | 20000 | ||||

Incremental revenue over cash expenses | C | 300000 | 300000 | 300000 | |||

Less: Overhaul of equipment year 2 | D | -60000 | |||||

Less: Depreciation | E | -200000 | -200000 | -200000 | |||

Net Income before tax | F = C-D-E | 100000 | 40000 | 100000 | |||

Less: Tax at 35% | G = F x 35% | 35000 | 14000 | 35000 | |||

Net income after tax | H = F-G | 65000 | 26000 | 65000 | |||

Add back depreciation | I | 200000 | 200000 | 200000 | |||

NOPAT | J = H+I | 265000 | 226000 | 265000 | |||

Total Cash Flows | K = A+B+J | -620000 | 265000 | 226000 | 285000 | ||

PVF at 15% | 1 | 0.869565 | 0.756144 | 0.657516 | |||

Present Value | -620000 | 230434.8 | 170888.5 | 187392.1 | $ (31,284.62) | ||

Shanks Corporation is considering a capital budgeting project
that involves investing $600,000 in equipment that would have a
useful life of 3 years and zero salvage value. The company would
also need to invest $20,000 immediately in working capital which
would be released for use elsewhere at the end of the project in 3
years. The net annual operating cash inflow, which is the
difference between the incremental sales revenue and incremental
cash operating expenses, would be $300,000 per year....

Shanks Corporation is considering a capital budgeting project
that involves investing $600,000 in equipment that would have a
useful life of 3 years and zero salvage value. The company would
also need to invest $20,000 immediately in working capital which
would be released for use elsewhere at the end of the project in 3
years. The net annual operating cash inflow, which is the
difference between the incremental sales revenue and incremental
cash operating expenses, would be $300,000 per year....

Shanks Corporation is considering a capital budgeting project
that involves investing $600,000 in equipment that would have a
useful life of 3 years and zero salvage value. The company would
also need to invest $20,000 immediately in working capital which
would be released for use elsewhere at the end of the project in 3
years. The net annual operating cash inflow, which is the
difference between the incremental sales revenue and incremental
cash operating expenses, would be $300,000 per year....

1.Coache Corporation is considering a capital budgeting project
that would require an investment of $350,000 in equipment with a 4
year useful life and zero salvage value. The annual incremental
sales would be $690,000 and the annual incremental cash operating
expenses would be $470,000. In addition, there would be a one-time
renovation expense in year 3 of $42,000. The company’s income tax
rate is 30%. The company uses straight-line depreciation on all
equipment.
The total cash flow net of income...

Coache Corporation is considering a capital budgeting project
that would require an investment of $300,000 in equipment with a 4
year useful life and zero salvage value. The annual incremental
sales would be $610,000 and the annual incremental cash operating
expenses would be $420,000. In addition, there would be a one-time
renovation expense in year 3 of $37,000. The company’s income tax
rate is 30%. The company uses straight-line depreciation on all
equipment.
The total cash flow net of income...

Coache Corporation is considering a capital budgeting project
that would require an investment of $360,000 in equipment with a 4
year useful life and zero salvage value. The annual incremental
sales would be $630,000 and the annual incremental cash operating
expenses would be $410,000. In addition, there would be a one-time
renovation expense in year 3 of $43,000. The company’s income tax
rate is 30%. The company uses straight-line depreciation on all
equipment.
The total cash flow net of income...

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...

Stockinger Corporation has provided the following information
concerning a capital budgeting project:
Investment required in equipment $ 314,000
Expected life of the project 4
Salvage value of equipment $ 0
Annual sales $ 665,000
Annual cash operating expenses $ 471,000
Working capital requirement $ 30,000
One-time renovation expense in year 3 $ 97,000
The company’s income tax rate is 30% and its after-tax
discount rate is 11%. The working capital would be required
immediately and would be released for use...

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life of five years and no salvage value. The company’s tax rate is
30% and its after-tax cost of capital is 13%. It uses the
straight-line depreciation method for financial reporting and tax
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1,570,000 Contribution margin 1,730,000 Fixed expenses:
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Sales
$
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Variable expenses
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