Asked by Aaron Silver on Jun 27, 2024
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Roemen Corporation is considering a capital budgeting project that would require investing $160,000 in equipment with a 4 year useful life and zero salvage value. Annual incremental sales would be $410,000 and annual incremental cash operating expenses would be $280,000. An investment of $20,000 in 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 company's tax rate is 30% and the after-tax discount rate is 12%.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!
Incremental Sales
The additional revenue generated from a specific business decision or action.
Cash Operating Expenses
Expenses incurred during the normal operation of a business that affect its cash position, such as rent, utilities, and payroll, excluding non-cash expenses like depreciation.
Working Capital
The difference between a company's current assets and its current liabilities, indicating the liquidity and operational efficiency of the business.
- Estimate the net present value of a capital budgeting initiative by accounting for upfront investment costs, cash receipts, and salvage values.
- Scrutinize the impact that various depreciation methods, particularly the straight-line method, exert on Net Present Value (NPV) calculations.
- Attain an understanding of the basic components of capital budgeting techniques, notably the Net Present Value (NPV) method.
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Learning Objectives
- Estimate the net present value of a capital budgeting initiative by accounting for upfront investment costs, cash receipts, and salvage values.
- Scrutinize the impact that various depreciation methods, particularly the straight-line method, exert on Net Present Value (NPV) calculations.
- Attain an understanding of the basic components of capital budgeting techniques, notably the Net Present Value (NPV) method.
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