The following information concerning a proposed capital budgeting project has been provided by Jochum Corporation:
Investment required in equipment | $180,000 |
Salvage value of equipment | $0 |
Working capital requirement | $30,000 |
Annual sales | $650,000 |
Annual cash operating expenses | $491,000 |
One-time renovation expense in year 3 | $70,000 |
The expected life of the project is 4 years. The income tax rate is 35%. The after-tax discount rate is 15%. The company uses straight-line depreciation on all equipment and the annual depreciation expense would be $45,000. 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 _____.
Lily Company is planning to buy a machine at a cost of $240,000. The machine will generate net cash inflows at the end of each year for the next 5 years of $70,000. At the end of 5 years, the machine will also have a salvage value of $40,000. Lily’s discount rate is 12%.
Compute the net present value of the machine.
An investment that costs $26,000 will produce annual cash flows of $5,200 for a period of 6 years. Further, the investment has an expected salvage value of $3,100. Given a desired rate of return of 12%, what will the investment generate?
a. A positive net present value of $1,571.
b. A positive net present value of $21,379.
c. A positive net present value of $26,000.
d. A negative net present value of $3,050.
Earthfriendly Inc. is considering two projects S and L, both of which have 5-year useful lives. Their cash flows are as follows:
Project S will require an initial outlay of $6,000 and generate free cash flows of $2,000 every year for 5 years.
Project L will require an initial outlay of $18,000 and generate free cash flows of $5,600 every year for 5 years.
Earthfriendly Inc.’s Weighted Average Cost of Capital (WACC) is 14%.
Which project would you recommend if the two projects are independent?