Stack Corporation is considering a capital budgeting project that would require

Question

Stack Corporation is considering a capital budgeting project that would require investing $80,000 in equipment with an expected life of 4 years and zero salvage value. Annual incremental sales would be $200,000 and annual incremental cash operating expenses would be $150,000. The project would also require a one-time renovation cost of $10,000 in year 3. The company's income tax rate is 35% and its after-tax discount rate is 7%. The company uses straight-line depreciation. 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 total cash flow net of income taxes in year 2 is:

$50,000

$33,000

$30,000

$39,500

$50,000

$33,000

$30,000

$39,500

Explanation / Answer

Solution -

Answer - $39,500

0 1 2 3 4 a Initial Cash Inflow / Investment -80,000 b Annual incremental sales 200000 200000 200000 200000 c Renovation Cost -10000 d Annual operating costs -150000 -150000 -150000 -150000 e Depreciation @ 25% of depreciation (SLM) -20000 -20000 -20000 -20000 f Net Profit (b-c-d-e) 30000 30000 20000 30000 g Taxes at 35% of Net Profit 10500 10500 7000 10500 h Profit after Tax ( f-g) 19500 19500 13000 19500 i Net Cash Flow ( h + e ) Adding Back depreciation 39500 39500 33000 39500 k Final /Total Net Cash Flow ( a+i) -80,000 39500 39500 33000 39500

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