1)Pont Corporation has provided the following information concerning a capital b
ID: 2456100 • Letter: 1
Question
1)Pont Corporation has provided the following information concerning a capital budgeting project: Investment required in equip is $160,000 expected project life 4 equip salvage value 0 annual sales $470,000 annual cash operating expenses $340 working capital requirement $20,000 one time renovation yr 3 is $70,000
The company's income tax rate is 30% and its after-tax discount rate is 10%. The working capital would be required immediately and would be released for use elsewhere at the end of the project. The company uses straight-line depreciation on all equipment. 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 total cash flow net of income taxes in year 2 is:
$90,000
$54,000
$130,000
QUESTION 2
Battaglia Corporation is considering a capital budgeting project that would require investing $240,000 in equipment with an expected life of 4 years and zero salvage value. Annual incremental sales would be $620,000 and annual incremental cash operating expenses would be $460,000. The project would also require a one-time renovation cost of $80,000 in year 3.
The company's income tax rate is 30% and its after-tax discount rate is 7%. The company uses straight-line depreciation. 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 total cash flow net of income taxes in year 2 is:
$160,000
$100,000
$130,000
$74,000
please show all work. Financial calculators are NOT permitted we are only allowed to use basic calculator. Thank you
Explanation / Answer
equipment= $160,000, Expected project life =4 years, salvage value= 0
Depreciation as per SLM = Asset - salvage value / life
= 160000 - 0 / 4 = 40000
Annual sales = $470,000
Annual cash operating expenses =$340000
Cash operating profit = 130000
Less = depreciation = 40000
Cash flow = 90000
Less - tax @30% = 27000
= 63000
Add- depreciation = 40000
= 103000
2. equipment value = $240,000, expected life = 4 years and salvage value= 0
Depreciation as per SLM = Asset - salvage value / life
= 240000 - 0 / 4 = 60000
Annual sales = $620,000
Annual cash operating expenses =$460000
Cash operating profit = 160000
Less = depreciation = 60000
Cash flow = 100000
Less - tax @30% = 30000
= 70000
Add- depreciation = 60000
= 130000
total cash flow net of income taxes in year 2 = 130000
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