Columbus Company is considering a project that requires an initial investment of $400,000. Its incremental cash flows are expected to be $150,000 per year for 5 years. The project would be depreciated on a straight-line basis over 5 years with no expected salvage value. The company has a stated policy that all projects must return their required investment dollars within the first 75% of the project's life. The company is subject to a 40% income tax rate, and its cost of capital is 10%. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required:1) Compute the project's after-tax net cash flows (NCF) by completing the following table: YearCash InflowsDepreciationTaxable IncomeCash Outflows for TaxesAfter-tax NCF1-5 2) Compute the project's net
present value by completing the following table. (Round the present value amounts to the nearest whole number.) YearAfter-tax NCFPresent Value FactorTotal Present Value0 1-5 3) Compute the project's payback period. 4) Should the project be accepted? Why or why not?
What will be an ideal response?
1) After-tax net cash flow:
| Year | Cash Inflows | Depreciation | Taxable Income | Cash Outflows for Taxes | After-tax NCF |
| 1-5 | $150,000 | $80,000 | $70,000 | $28,000 | $122,000 |
2) Net present value:
| Year | After-tax NCF | Present Value Factor | Total Present Value | ||||||||||||
| 0 | $ | (400,000 | ) | 1.000000 | $ | (400,000 | ) | ||||||||
| 1-5 | $ | 122,000 | 3.790787 | $ | 462,476 | ||||||||||
| Net Present Value | $ | 62,476 | |||||||||||||
4) The project should be accepted because it will earn more than 10% and it does recover its initial investment within the first 75% of the project life. (2.67 years is 53.4% of the project life.)
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