Hothan Corporation has provided the following information concerning a capital b

Question

Hothan Corporation has provided the following information concerning a capital budgeting project: Picture 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. The depreciation expense will be $60,000 per year. 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 income tax rate is 30% and the after-tax discount rate is 15%. Required: Determine the net present value of the project. Show your work!

Explanation / Answer

Hothan Corporation - Capital Budgeting Project Assumption Cash flow at the end of each year $200,000 Working capital requirement $30,000 Initail Outlay $300,000 No. of years 5 years Depreciation $60,000 Discount rate 15% Tax Rate 30% Calculation of CFAT Year - 0 year 1 Year - 2 Year 3 Year 4 Year 5 Intial outlay $300,000 Revenue $200,000 $200,000 $200,000 $200,000 $200,000 Less : - working capital requirement $30,000 $30,000 $30,000 $30,000 $30,000 EBIDTA $170,000 $170,000 $170,000 $170,000 $170,000 Less: - Depreciation $60,000 $60,000 $60,000 $60,000 $60,000 EBIT $110,000 $110,000 $110,000 $110,000 $110,000 Tax $33,000 $33,000 $33,000 $33,000 $33,000 Earning After tax $77,000 $77,000 $77,000 $77,000 $77,000 Add: - Depreciation $60,000 $60,000 $60,000 $60,000 $60,000 CFAT $137,000 $137,000 $137,000 $137,000 $137,000 PV of Cash Flow @ 15 % of discount rate $0.8696000 $0.7561000 $0.6575000 $0.5718000 $0.4972000 Present value of cash flows $119,135 $103,586 $90,078 $78,337 $68,116 PV of cash inflow $459,251 PV of cash outflow $300,000 Net presrent value $159,251 Present value of cash inflow - present value of cash outflow

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