Sader Corporation is considering a capital budgeting project that would require an investment of $160,000 in equipment with a 4 year expected life and zero salvage value. Annual incremental sales will be $420,000 and annual incremental cash operating expenses will be $320,000. The company's income tax rate is 30% and the after-tax discount rate is 8%. The company uses straight-line depreciation on all equipment; the annual depreciation expense will be $40,000. 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 present value of the project is closest to:
A)$271,584
B)$111,584
C)$171,200
D)$168,000

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by determining the after-tax cash flows, which include the tax savings from depreciation, and then discounting them at the after-tax discount rate. The annual cash flow before tax is $100,000 ($420,000 - $320,000), and after tax is $70,000 ($100,000 * (1 - 0.30)). The tax savings from depreciation is $12,000 ($40,000 * 0.30). The total annual after-tax cash flow is $82,000 ($70,000 + $12,000). The NPV is the present value of these cash flows over 4 years minus the initial investment, which is closest to $111,584.

Sader Corporation Is Considering a Capital Budgeting Project That Would