Kostka Corporation is considering a capital budgeting project that would require
ID: 2474740 • Letter: K
Question
Kostka Corporation is considering a capital budgeting project that would require investing $160,000 in equipment with an expected life of 4 years and zero salvage value. Annual incremental sales would be $480,000 and annual incremental cash operating expenses would be $330,000. The project would also require an immediate investment in working capital of $20,000 which would be released for use elsewhere at the end of the project. The project would also require a one-time renovation cost of $0 in year 3. The company's income tax rate is 30% and its after-tax discount rate is 9%. 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 net present value of the entire project is closest to:
$213,123
$198,963
$308,000
$320,010
Explanation / Answer
Note: renovation cost will have no effect as there is no rennovation cost.
Year 0 1 2 3 4 NPV investment $ -1,60,000 working capital $ -20,000 Incremental sales $ 4,80,000 $ 4,80,000 $ 4,80,000 $ 4,80,000 Incremental cash operating expense $ -3,30,000 $ -3,30,000 $ -3,30,000 $ -3,30,000 Depreciation $ -40,000 $ -40,000 $ -40,000 $ -40,000 Profit before tax $ 1,10,000 $ 1,10,000 $ 1,10,000 $ 1,10,000 Tax @ 30% $ 33,000 $ 33,000 $ 33,000 $ 33,000 Profit after tax $ 77,000 $ 77,000 $ 77,000 $ 77,000 Add: depreciation $ 40,000 $ 40,000 $ 40,000 $ 40,000 Wrecovery of working capital $ 20,000 Cash flow $ -1,80,000 $ 1,17,000 $ 1,17,000 $ 1,17,000 $ 1,37,000 PV factor @ 9% $ 1.000 $ 0.917 $ 0.842 $ 0.772 $ 0.708 PV of cash flow $ -1,80,000 $ 1,07,289 $ 98,514 $ 90,324 $ 96,996 $ 2,13,123Related Questions
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