Question

A company needs an increase in working capital of $50,000 in a project that will last 4 years. The company's tax rate is 30% 4 and its after-tax discount rate is 8%. Click here to view Exhibit 13B-1 to determine the appropriate discount factor(s) using table. The present value of the release of the working capital at the end of the project is closest to: 02:-37.10 Multiple Choice $36,750 $15,000 $25,726 < Prev 40.10 Next>

Answer 1

Ans (4)	Present value of release of working capital at the end of project is closest to $36750
	Working Capital release in year 4	$           50,000.00
	P.V @ 8% for 4 years	0.735
	P.V	$           36,750.00
		Rhoads Corporation
	Year	0	1	2	3	4
	Investment	$     (1,60,000.00)
	Revenue=(A)		$        4,60,000.00	$     4,60,000.00	$        4,60,000.00	$      4,60,000.00
	Expenses=(B)		$        3,30,000.00	$     3,30,000.00	$        3,30,000.00	$      3,30,000.00
	Depreciation=($160000/4)=(C)		$           40,000.00	$         40,000.00	$            40,000.00	$          40,000.00
	Income before tax=(D)=(A)-(B)-(C )		$           90,000.00	$         90,000.00	$            90,000.00	$          90,000.00
	Taxes=(E )=(D)*30%		$           27,000.00	$         27,000.00	$            27,000.00	$          27,000.00
	Profit after tax=(F )=(D )-(E )		$           63,000.00	$         63,000.00	$            63,000.00	$          63,000.00
	Add: Depreciation=(G)		$           40,000.00	$         40,000.00	$            40,000.00	$          40,000.00
	Cash Inflow=(H)=(F)+(G)		$        1,03,000.00	$     1,03,000.00	$        1,03,000.00	$      1,03,000.00
	Cash Inflow=(I)	$     (1,60,000.00)	$        1,03,000.00	$     1,03,000.00	$        1,03,000.00	$      1,03,000.00
	P.V Factor @15%=(J)	1	0.87	0.756	0.658	0.572
	Present Value=(I)*(J)	$     (1,60,000.00)	$           89,610.00	$         77,868.00	$            67,774.00	$          58,916.00
Ans 5	NPV	$       1,34,168.00
Ans 6)	$158000
		Fontana Corporation
	Year	0	1	2	3	4
	Investment	$     (2,40,000.00)
	Revenue=(A)		$        6,40,000.00	$     6,40,000.00	$        6,40,000.00	$      6,40,000.00
	Expenses=(B)		$        4,40,000.00	$     4,40,000.00	$        4,40,000.00	$      4,40,000.00
	Depreciation=($240000/4)=(C)		$           60,000.00	$         60,000.00	$            60,000.00	$          60,000.00
	Income before tax=(D)=(A)-(B)-(C )		$        1,40,000.00	$     1,40,000.00	$        1,40,000.00	$      1,40,000.00
	Taxes=(E )=(D)*30%		$           42,000.00	$         42,000.00	$            42,000.00	$          42,000.00
	Profit after tax=(F )=(D )-(E )		$           98,000.00	$         98,000.00	$            98,000.00	$          98,000.00
	Add: Depreciation=(G)		$           60,000.00	$         60,000.00	$            60,000.00	$          40,000.00
	Cash Inflow=(H)=(F)+(G)		$        1,58,000.00	$ 1,58,000.00	$        1,58,000.00	$      1,38,000.00