Question

Dobrinski Corporation has provided the following information concerning a capital budgeting project:

After-tax discount rate		14	%
Tax rate		30	%
Expected life of the project		4
Investment required in equipment	$	274,000
Salvage value of equipment	$	0
Working capital requirement	$	38,500
Annual sales	$	715,000
Annual cash operating expenses	$	531,000
One-time renovation expense in year 3	$	72,750

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.

Click here to view Exhibit 13B-1 to determine the appropriate discount factor(s) using table.

The net present value of the project is closest to: (Round intermediate calculations and final answer to the nearest dollar amount.)

Garrison 16e updates 06-15-2018

Garrison 16e Rechecks 2018-09-04

• $144,380

• $231,250

• $110,974

• $61,649

Answer 1

Answer is $110974

Calculated as

Calculation of Per year inflow

Annual sales	$715,000
Less: Annual cash operating expenses	$531,000
Less:depreciation	$68,500
Net income before tax	$115,500
Tax @ 30% of net income	$34,650
Net income after tax	$80,850
Add: Depreciation	$68,500
Cash flow per year	$149,350

Calculation of NPV

	Year	Cash Flow	10% PV Factor	Present Value of Cash Flow
Purchase of Equipment and Working Capital	Now	$       (312,500)	1	$       (312,500)
Annual Cash Inflow	1-4	$          149,350	2.913	$          435,057
Renovation expense after tax= (72750-30%)	3	$          (50,925)	0.675	$          (34,374)
Working capital release	4	$            38,500	0.592	$            22,792
Net Present Value				$          110,974

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