(Appendix 8C) Prudencio Corporation has provided the following information conce

ID: 2487344 • Letter: #

Question

(Appendix 8C) Prudencio Corporation has provided the following information concerning a capital budgeting project: After-tax discount rate 13% Tax rate 30% Expected life of the project 4 Investment required in equipment $160,000 Salvage value of equipment $0 Annual sales $400,000 Annual cash operating expenses $290,000 One-time renovation expense in year 3 $40,000 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: $85,282 $139,420 $245,282 $168,000

Please show work. Thanks!

Explanation / Answer

Computation of present value of cash inflow

Year 1

Year 2

Year 3

Year 4

Annual sales

$400,000

Less- Annual cash operating expenses

$290,000

Less- One-time renovation expense

$40,000

Add- tax savings due to depreciation

12,000

Cash inflows

122,000

82,000

Present value factor (13%)

0.8850

0.7831

0.6931

0.6133

Present value of cash inflows

107965

95544

84552

50292

Present value of cash inflows = 338353

Present value of cash outflow = 160000

Net present value = Present value of cash Inflow - Present value of cash outflow

= 338353 – 160000

= 178353