Glasco Corporation has provided the following information concerning a capital b

Question

Glasco Corporation has provided the following information concerning a capital budgeting project:

After tax discount rate……15%

Tax rate………….35%

Expected life of the project……..4

Investment required in equipment………$80,000

Salvage value of equipment……$0

Working capital requirement……….$20,000

Annual sales……….$240,000

Annual cash operating expenses……….$190,000

One-time renovation expense in year 3……..$20,000

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:

$4,258

$15,698

$65,000

$41,080

Please show all work

Explanation / Answer

Year Sales Expenses income depreciation EBT Tax @ 35% EAT Cash flows

1 240000 190000 50000 20000* 30000 10500 19500 39500

2 240000 190000 50000 20000* 30000 10500 19500 39500

3 240000 210000* 30000 20000* 10000 3500 6500 26500

4 240000 190000 50000 20000* 30000 10500 19500 39500

*210000 = operating expense 190000 + rennovation expenses 20000

* 20000 = 80000 / 4

Year Cash flows Discount@15% PVCF

1 39500 0.8696 34349.2

2 39500 0.7561 29865.95

3 26500 0.6575 17423.75

4 39500 0.5718 22586.1

PVcash flows 104225

initial investment +

working capital (100000)

NPV 4225

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