Consider a capital budgeting project with the following characteristics: Purchase price = $100,000 Net income for...

Consider a capital budgeting project with the following characteristics:

Purchase price = $100,000
Net income for the next 3 years is expected to be $30,000, $90,000, and $150,000, respectively.
Depreciation expense for the next 3 years will be $5,000, $3,000, and $2,000, respectively.
Salvage value = $0
Expected rate of return = 10%

The net present value (NPV) of this project is closest to:

	a.	$250,614
	b.	$175,600
	c.	$122,878
	d.	$151,669
	e.	$369,996

The computation of the terminal cash flow for an expansion project must consider which of the following?

	a.	Opportunity cost of the project.
	b.	Book value of the existing asset.
	c.	Sunk cost of the project.
	d.	Increases or decreases in net working capital.
	e.	Inflation during the project's life.

Expert Solution

Statement showing Cash flows
Particulars	Time	PVf 10%	Amount	PV
Cash Outflows	-	1.00	(100,000.00)	(100,000.00)
PV of Cash outflows = PVCO				(100,000.00)
Cash inflows =30,000 + 5,000	1.00	0.9091	35,000.00	31,818.18
Cash inflows = 90,000 + 3,000	2.00	0.8264	93,000.00	76,859.50
Cash inflows = 150,000+2,000	3.00	0.7513	152,000.00	114,199.85
PV of Cash Inflows =PVCI				222,877.54
NPV= PVCI - PVCO				122,878

Q2 b. Book value of the existing asset.

jeff jeffy answered 2 years ago

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