Question

The following information concerning a proposed capital budgeting project has been provided by Jochum Corporation:

Click here to view Exhibit 13B-1 to determine the appropriate discount factor(s) using tables.

Investment required in equipment	$	164,000
Salvage value of equipment	$	0
Working capital requirement	$	22,000
Annual sales	$	630,000
Annual cash operating expenses	$	487,000
One-time renovation expense in year 3	$	50,000

The expected life of the project is 4 years. The income tax rate is 30%. The after-tax discount rate is 11%. The company uses straight-line depreciation on all equipment and the annual depreciation expense would be $41,000. 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: (Round intermediate calculations and final answer to the nearest dollar amount.)

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

Multiple Choice

• $123,195

• $250,600

• $151,690

• $225,000

Answer 1

Year	Cash flow	Annuity discount factor at 11%	present Value
0	(164,000)	1	(164,000)
0	(22000)	1	(22000)
1	112400	0.9009[1/1.11]1	101261[112400*0.9009]
2	112400	0.81162[1/1.11]2	91226[112400*0.81162]
3	77400	0.73119[1/1.11]3	56595[77400*0.7312]
4	112400	0.65873[1/1.11]4	74041[112400*0.6587]
4	22000 (working capital will be received back)	0.65873[1/1.11]4	14492[22000*0.6587]
		Net present Value	151615$
		[101261+91226+56595+74041+14492-22000-164000]
		NPV IS CLOSEST TO $151690

	1	2	3	4
sales	630000	630000	630000	630000
expenses	-487000	487000	487000	487000
Additional expenses	0	0	50000	0
Depreciation	-41000	41000	41000	41000
Profit before tax	102000	102000	52000	102000
tax at 30%	30600[102000*30%]	30600	15600[52000*30%]	30600
Profit after tax	71400 [102000-30600]	71400	36400 [52000-15600]	71400
Add Non cash expense depreciation	41000	41000	41000	41000
After Tax cash flows	112400 [71400+41000]	112400	77400	112400