Sader Corporation is considering a capital budgeting project that would require

Question

Sader Corporation is considering a capital budgeting project that would require an investment of $160,000 in equipment with a 4 year expected life and zero salvage value. Annual incremental sales will be $420,000 and annual incremental cash operating expenses will be $320,000. The company's income tax rate is 30% and the after-tax discount rate is 8%. The company uses straight-line depreciation on all equipment; the annual depreciation expense will be $40,000. 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 project is closest to:

$271,584

$111,584

$171,200

$168,000

$271,584

$111,584

$171,200

$168,000

Explanation / Answer

Year Sales Expenses net income depreciation EBT Tax@30% EAT Cash flows

1 420000 320000 100000 40000 60000 18000 42000 82000

2 420000 320000 100000 40000 60000 18000 42000 82000

3 420000 320000 100000 40000 60000 18000 42000 82000

4 420000 320000 100000 40000 60000 18000 42000 82000

Year Cash flows Discount@8% PVCF

1 82000 0.9259 75923.8

2 82000 0.8573 70298.6

3 82000 0.7938 65091.6

4 82000 0.7350 60270

PV cash flows 271584

initial investment (160000)

NPV 111584.

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