Haroldsen Corporation is considering a capital budgeting project that would requ

Question

Haroldsen Corporation is considering a capital budgeting project that would require an initial investment of $350,000. The investment would generate annual cash inflows of $133,000 for the life of the project, which is 4 years. At the end of the project, equipment that had been used in the project could be sold for $32,000. The company's discount rate is 14%. The net present value of the project is closest to: Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using the tables provided. $214,000 $37,429 $56,373 $406,373

Explanation / Answer

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=133000/1.14+133000/1.14^2+133000/1.14^3+133000/1.14^4+32000/1.14^4

=133000[1/1.14+1/1.14^2+1/1.14^3+1/1.14^4]+32000/1.14^4

=133000*2.914+32000*0.592

=$406506

Hence NPV=Present value of inflows-Present value of outflows

=$406506-$350,000

=$56373(Approx)(C).

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