Question

Slick Company is considering a capital project involving a $225,000 investment in machinery and a $45,000 investment in working capital. The machine has an expected useful life of 10 years and no salvage value. The annual cash inflows (before taxes) are estimated at $90,000 with annual cash outflows (before taxes) of $30,000. The company uses straight-line depreciation. Assume the federal income tax rate is 40%. The company's new accountant computed the net present value of the project using a minimum required rate of return of 16% (the company's cost of capital). The accountant's computations follow: Cash inflows Cash outflows Net cash inflow Present value factor at 16% Present value of net cash inflow Initial cash outlay Net present value $ 90,000 30,000 $ 60,000 x 4.833 $289,980 225,000 $ 64,980 a. Are the accountant's computations correct? If not, compute the correct net present value. b. Is this capital project acceptable to the company? Why or why not?

Answer 1

PAGE NO.:( DATE: 1 4 Accountant's Computation's is incorrect. He is not considering working Capitel. Therefore Calculat will brit Calculation of Net Present Value ia Cif Pue 16% (225068 + 45000 (270000] 60,000 51724 Goooo 44590 66,000 38429 60080 60000 Gooco 24627 Goooo 21230 Goooo 18302 Goooo 15767 (60000 +45000) 23802 Net Besut Volu 20195 33137 28567 by for the inflow Capital project is acceptable Company bleaus of Positive to the Company, Project will generate positive returus.