Shinabery Corporation has provided the following information concerning a capita
ID: 2472644 • Letter: S
Question
Shinabery Corporation has provided the following information concerning a capital budgeting project:
Investment required in equipment
$40,000
Expected life of the project
4
Salvage value of equipment
$0
Annual sales
$160,000
Annual cash operating expenses
$120,000
Working capital requirement
$20,000
One-time renovation expense in year 3
$20,000
The company's income tax rate is 35% and its after-tax discount rate is 9%. 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 net present value of the entire project is closest to:
39,675
68,280
25,515
65,000
Investment required in equipment
$40,000
Expected life of the project
4
Salvage value of equipment
$0
Annual sales
$160,000
Annual cash operating expenses
$120,000
Working capital requirement
$20,000
One-time renovation expense in year 3
$20,000
Explanation / Answer
NPV is more closer to $39,675
Year 0 Year 1 Year 2 Year 3 Year 4 Total Annual sales $160,000 $160,000 $160,000 $160,000 $640,000 Cash Operating expenses $120,000 $120,000 $120,000 $120,000 $480,000 Investment $40,000 $40,000 One time renovation $20,000 $20,000 $0 Total expenses $40,000 $120,000 $120,000 $140,000 $120,000 $540,000 Net cash ($40,000) $40,000 $40,000 $20,000 $40,000 $100,000 Tax at 35% $14,000 $14,000 $7,000 $14,000 $49,000 Tax on Depreciation saved $3,500 $3,500 $3,500 $3,500 $14,000 Balance Cash ($40,000) $29,500 $29,500 $16,500 $29,500 $65,000 Discount at 9% 1.0000 0.9174 0.8417 0.7722 0.7084 Discounted cash flow ($40,000) $27,064 $24,830 $12,741 $20,899 $45,533 Working capital requirement ($20,000) $20,000 Discounted WC ($20,000) $14,169 ($5,831) Net Present value $39,702Related Questions
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