Asked by Alexia Hutton on Jun 22, 2024
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Dunstan Corporation is considering a capital budgeting project that involves investing $450,000 in equipment that would have a useful life of 3 years and zero salvage value. The company would also need to invest $20,000 immediately in working capital which would be released for use elsewhere at the end of the project in 3 years. The net annual operating cash inflow, which is the difference between the incremental sales revenue and incremental cash operating expenses, would be $220,000 per year. The company uses straight-line depreciation and the depreciation expense on the equipment would be $150,000 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%. The after-tax discount rate is 11%.Click here to view Exhibit 14B-1, to determine the appropriate discount factor(s) using the table provided.Required:Determine the net present value of the project. Show your work!
Straight-Line Depreciation
A method for apportioning the cost of a tangible asset over its viable life in steady yearly figures.
Operating Cash Inflow
Funds that are generated from a company's normal business operations, reflecting the cash inflows from selling goods and services.
Working Capital
The difference between a company's current assets and its current liabilities, indicating the liquid assets available for day-to-day operations.
- Calculate the present value net of costs for a project in capital budgeting, including initial financial commitments, inflows of cash, and the values at salvage.
- Analyze how the application of depreciation, specifically through the straight-line method, affects the calculations of Net Present Value (NPV).
- Familiarize yourself with the primary principles of capital budgeting approaches, particularly the Net Present Value (NPV) technique.
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Learning Objectives
- Calculate the present value net of costs for a project in capital budgeting, including initial financial commitments, inflows of cash, and the values at salvage.
- Analyze how the application of depreciation, specifically through the straight-line method, affects the calculations of Net Present Value (NPV).
- Familiarize yourself with the primary principles of capital budgeting approaches, particularly the Net Present Value (NPV) technique.
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