Layer Corporation has provided the following information concerning a capital budgeting project: The company's income tax rate is 30% and its after-tax discount rate is 8%. The working capital would be required immediately and would be released for use elsewhere at the end of the 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) $50,660
B) $25,616
C) $10,916
D) $70,000

Question

Layer Corporation has provided the following information concerning a capital budgeting project:  The company's income tax rate is 30% and its after-tax discount rate is 8%. The working capital would be required immediately and would be released for use elsewhere at the end of the 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) $50,660 
B) $25,616 
C) $10,916 
D) $70,000

Quizplus · Accepted Answer

Using the provided information and Exhibit 14B-1 tables, the net present value of the project can be calculated as follows:
Initial investment: -$100,000
Year 1 cash inflow: $20,000
Year 2 cash inflow: $40,000
Year 3 cash inflow: $60,000
Year 4 cash inflow: $80,000
Year 5 cash inflow: $100,000
Salvage value: $20,000
Depreciation expense: ($100,000 - $20,000) / 5 = $16,000 per year
Year 1: ($20,000 - $16,000) / (1 + 0.08) = $3,700
Year 2: ($40,000 - $16,000) / (1 + 0.08)^2 = $6,505
Year 3: ($60,000 - $16,000) / (1 + 0.08)^3 = $8,684
Year 4: ($80,000 - $16,000) / (1 + 0.08)^4 = $9,548
Year 5: ($100,000 - $16,000 + $20,000) / (1 + 0.08)^5 = $11,179
Net present value = $3,700 + $6,505 + $8,684 + $9,548 + $11,179 - $100,000 + $20,000 = $25,616
Therefore, the net present value of the entire project is $25,616, which is closest to option B ($25,616).

Layer Corporation Has Provided the Following Information Concerning a Capital