Jonathon Miller's Co, has provided the following information concerning a capital budgeting project: Investment required in equipment $160,000 Expected life of the project 4 years Salvage value of the equipment $0 Annual sales $360,000 Annual cash operating expenses $290,000 Working capital requirement $20,000 One-time renovation expense in year 3 $20,000 The company’s income tax rate is 30% and its after-tax discount rate is 8%. 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: The following tables have been provided for your reference (using tables provided is optional): Present Value of $1; 1 / (1+r)n Periods 4% 5% 6% 7% 8% 9% 10% 11% 12% 1 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 2 0.925 0.907 0.890 0.873 0.857 0.842 0.826 0.812 0.797 3 0.889 0.864 0.840 0.816 0.794 0.772 0.751 0.731 0.712 4 0.855 0.823 0.792 0.763 0.735 0.708 0.683 0.659 0.636 5 0.822 0.784 0.747 0.713 0.681 0.650 0.621 0.593 0.567 Present Value of an Annuity of $1 in Arrears; 1/r[1-(1/r)n] Periods 4% 5% 6% 7% 8% 9% 10% 11% 12% 1 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 2 1.886 1.859 1.833 1.808 1.783 1.759 1.736 1.713 1.690 3 2.775 2.723 2.673 2.624 2.577 2.531 2.487 2.444 2.402 4 3.630 3.546 3.465 3.387 3.312 3.240 3.170 3.102 3.037 5 4.452 4.329 4.212 4.100 3.993 3.890 3.791 3.696 3.605 Choose one below: $70,000 $40,916 $10,916 $25,616 There is no correct solution $50,660

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 13E: Buena Vision Clinic is considering an investment that requires an outlay of 600,000 and promises a...

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Jonathon Miller's Co, has provided the following information concerning a capital budgeting project:

Investment required in equipment	$160,000
Expected life of the project	4 years
Salvage value of the equipment	$0
Annual sales	$360,000
Annual cash operating expenses	$290,000
Working capital requirement	$20,000
One-time renovation expense in year 3	$20,000

The company’s income tax rate is 30% and its after-tax discount rate is 8%. 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:

The following tables have been provided for your reference (using tables provided is optional):

Present Value of $1; 1 / (1+r)ⁿ

Periods	4%	5%	6%	7%	8%	9%	10%	11%	12%
1	0.962	0.952	0.943	0.935	0.926	0.917	0.909	0.901	0.893
2	0.925	0.907	0.890	0.873	0.857	0.842	0.826	0.812	0.797
3	0.889	0.864	0.840	0.816	0.794	0.772	0.751	0.731	0.712
4	0.855	0.823	0.792	0.763	0.735	0.708	0.683	0.659	0.636
5	0.822	0.784	0.747	0.713	0.681	0.650	0.621	0.593	0.567

Present Value of an Annuity of $1 in Arrears; 1/r[1-(1/r)ⁿ]

Periods	4%	5%	6%	7%	8%	9%	10%	11%	12%
1	0.962	0.952	0.943	0.935	0.926	0.917	0.909	0.901	0.893
2	1.886	1.859	1.833	1.808	1.783	1.759	1.736	1.713	1.690
3	2.775	2.723	2.673	2.624	2.577	2.531	2.487	2.444	2.402
4	3.630	3.546	3.465	3.387	3.312	3.240	3.170	3.102	3.037
5	4.452	4.329	4.212	4.100	3.993	3.890	3.791	3.696	3.605

Choose one below:

$70,000

$40,916

$10,916

$25,616

There is no correct solution

$50,660

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