please answer thoroughly thank you. Hothan Corporation has provided the followin
ID: 2490974 • Letter: P
Question
please answer thoroughly thank you.
Hothan Corporation has provided the following information concerning a capital budgeting project: 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%. Determine the net present value of the project. Show your work!Explanation / Answer
First of all we collect initial cash outflow = investment $240000 + Working Capital $20000 = $260000
Annual income = Sales $510000 - Cash expense $380000 - Depreciation $60000 = $70000
Annual Cash inflow = $70000 * (1 - 0.30) + Non cash expense $60000 = $49000 + $60000 = $109000
Cash flow at the end of the project = Working Capital $20000
Present Value of Future Cash Inflow = Annual Cash Flow * PVIFA(15%,4) + Working Capital * PVIF(15%,4)
=109000 * 2.8550 + 20000 * 0.5718 = $322631
NPV = Present Value of Future Cash Inflow - Initial cash outflow = $322631 - $260000 = $62631
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