Shanks Corporation is considering a capital budgeting project that involves investing $640,000 in equipment that would have a useful life of 3 years and zero salvage value. The company would also need to invest $29,500 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 $357,000 per year. The project would require a one-time renovation expense of $74,250 at the end of year 2. The company uses straight-line depreciation and the depreciation expense on the equipment would be $213,333 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 15%. Click here to view Exhibit 14B-1 to determine the appropriate discount factor(s) using table. Required: Determine the net present value of the project. (Negative amount must be entered with a minus sign. Round intermediate calculations and final answer to the nearest dollar amount.) Net present value
Shanks Corporation is considering a capital budgeting project that involves investing $640,000 in equipment that would have a useful life of 3 years and zero salvage value. The company would also need to invest $29,500 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 $357,000 per year. The project would require a one-time renovation expense of $74,250 at the end of year 2. The company uses straight-line depreciation and the depreciation expense on the equipment would be $213,333 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 15%. Click here to view Exhibit 14B-1 to determine the appropriate discount factor(s) using table. Required: Determine the net present value of the project. (Negative amount must be entered with a minus sign. Round intermediate calculations and final answer to the nearest dollar amount.) Net present value
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Shanks Corporation is considering a capital budgeting project that involves investing $640,000 in equipment that would have a useful
life of 3 years and zero salvage value. The company would also need to invest $29,500 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 $357,000 per year. The project would require a
one-time renovation expense of $74,250 at the end of year 2. The company uses straight-line depreciation and the depreciation
expense on the equipment would be $213,333 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 15%.
Click here to view Exhibit 14B-1 to determine the appropriate discount factor(s) using table.
Required:
Determine the net present value of the project. (Negative amount must be entered with a minus sign. Round intermediate
calculations and final answer to the nearest dollar amount.)
Net present value
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