Question

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

Investment required in equipment $450,000
Net annual operating cash inflow $220,000
Tax rate 30%
After-tax discount rate 12%

The expected life of the project and the equipment is three years, and the equipment has zero salvage value. The company uses straight-line depreciation on all equipment, and the depreciation expense on the equipment would be $150,000 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 net annual operating cash inflow is the difference between the incremental sales revenue and incremental cash operating expenses.

Required:
Determine the net present value of the project.

Answer 1

Answer:

$27964.4

Explanation:

Solution

Given that

From the given question, we are required to determine the net present value of the project.

Now

We input our values in  a tabular form shown below:

Year                                     0               1                2             3

The Initial investment -450000

Operating cash flow                       220000 220000    220000

The Depreciation                            150000  150000     150000

Taxable Income

(Operating Cash Flow-Dep)            70000   70000       70000

Tax at 30%                                        21000     21000       21000

Net Income=

Taxable Income-Tax                       49000 49000          49000

Net Cash Flow=

Net Income+Dep            -450000   199000   199000      199000

P.V at 12%=

Net Cash Flow/(1.12^n)  -450000 177678.5714158641.  6141644.3

Net Present Value

(N.P.V)                          27964.4224

Therefore, the net present value is $27964.4