Rollans Corporation has provided the following information concerning a capital budgeting project: 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 14B-1, to determine the appropriate discount factor(s) using the tables provided.The net present value of the entire project is closest to:
A) $308,778
B) $224,000
C) $108,778
D) $118,230

Question

Rollans Corporation has provided the following information concerning a capital budgeting project:  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 14B-1, to determine the appropriate discount factor(s) using the tables provided.The net present value of the entire project is closest to:
A) $308,778 
B) $224,000 
C) $108,778 
D) $118,230

Quizplus · Accepted Answer

To calculate the net present value (NPV), we need to find the present value (PV) of each year's cash inflows and outflows, and then add them up. The appropriate discount factor can be found in Exhibit 14B-1, using the given interest rate and years.

Year 0:
- Initial investment: $800,000

Year 1: 
- Depreciation: ($800,000 / 4) = $200,000
- Tax savings from depreciation: ($200,000 x 0.4) = $80,000
- Cash inflow: $250,000
- Net cash flow: $330,000
- Discount factor: 0.877
- Present value: ($330,000 x 0.877) = $289,110

Year 2: 
- Depreciation: ($800,000 / 4) = $200,000
- Tax savings from depreciation: ($200,000 x 0.4) = $80,000
- Cash inflow: $300,000
- Net cash flow: $380,000
- Discount factor: 0.769
- Present value: ($380,000 x 0.769) = $292,220

Year 3: 
- Depreciation: ($800,000 / 4) = $200,000
- Tax savings from depreciation: ($200,000 x 0.4) = $80,000
- Cash inflow: $400,000
- Net cash flow: $480,000
- Discount factor: 0.675
- Present value: ($480,000 x 0.675) = $324,000

Year 4: 
- Depreciation: ($800,000 / 4) = $200,000
- Tax savings from depreciation: ($200,000 x 0.4) = $80,000
- Cash inflow: $500,000
- Net cash flow: $580,000
- Discount factor: 0.592
- Present value: ($580,000 x 0.592) = $343,360

Adding up the present values of each year's cash flows, and subtracting the initial investment:

NPV = ($289,110 + $292,220 + $324,000 + $343,360) - $800,000 = $108,778

Therefore, the best choice is C, with an NPV closest to $108,778.

Rollans Corporation Has Provided the Following Information Concerning a Capital