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 3
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:
What is the net present value of the project?
I NEED AN ANS.
To find the net present value (NPV) of the project, you need to calculate the present value of the cash flows associated with the project and then subtract the initial investment. Here are the steps to calculate the net present value:
1. Calculate the annual after-tax cash flows: Subtract the depreciation expense from the net annual operating cash inflow to get the after-tax operating cash flow.
After-tax operating cash flow = Net annual operating cash inflow - Depreciation expense
After-tax operating cash flow = $220,000 - $150,000
After-tax operating cash flow = $70,000
2. Determine the present value of the after-tax cash flows: To calculate the present value of the after-tax cash flows, you need to discount them using the after-tax discount rate. Since the after-tax operating cash flow is the same for each year, you can find the present value as follows:
Year 1: Present value = after-tax operating cash flow / (1 + after-tax discount rate)^1
Year 2: Present value = after-tax operating cash flow / (1 + after-tax discount rate)^2
Year 3: Present value = after-tax operating cash flow / (1 + after-tax discount rate)^3
Present value of year 1 cash flow = $70,000 / (1 + 0.12)^1 = $62,500
Present value of year 2 cash flow = $70,000 / (1 + 0.12)^2 = $55,580
Present value of year 3 cash flow = $70,000 / (1 + 0.12)^3 = $49,519
3. Calculate the present value of the initial investment: Since the initial investment occurs at the beginning of the project, it does not need to be discounted. Therefore, the present value of the initial investment is simply the amount itself.
Present value of initial investment = Initial investment = $450,000
4. Calculate the net present value: Subtract the present value of the initial investment from the sum of the present values of the after-tax cash flows.
Net present value = Present value of year 1 cash flow + Present value of year 2 cash flow + Present value of year 3 cash flow - Present value of initial investment
Net present value = $62,500 + $55,580 + $49,519 - $450,000
Once you perform the calculations, you will get the net present value of the project.