Sester Corporation has provided the following information concerning a capital budgeting project: Investment required in equipment$750,000 Net annual operating cash inflow$360,000 One-time renovation expense in year 2$70,000 Tax rate 30%After-tax discount rate 7%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 $250,000 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:Determine the net present value of the project. Show your work!
What will be an ideal response?
| Year |
| ? | Now | 1 | 2 | 3 |
| Calculate the annual tax expense: | ? | ? | ? | ? |
| Net annual op. cash inflow | ? | $360,000 | $360,000 | $360,000 |
| One-time expense | ? | ? | $(70,000) | ? |
| Depreciation expense | ? | $(250,000) | $(250,000) | $(250,000) |
| Incremental net income | ? | $110,000 | $40,000 | $110,000 |
| Tax rate | ? | 30% | 30% | 30% |
| Income tax expense | ? | $(33,000) | $(12,000) | $(33,000) |
| ? | ? | ? | ? | ? |
| Calculate the net present value: | ? | ? | ? | ? |
| Purchase of equipment | $(750,000) | ? | ? | ? |
| Net annual op. cash inflow | ? | $360,000 | $360,000 | $360,000 |
| One-time expense | ? | ? | $(70,000) | ? |
| Income tax expense | $(33,000) | $(12,000) | $(33,000) | |
| Total cash flows | $(750,000) | $327,000 | $278,000 | $327,000 |
| Discount factor (7%) | 1.000 | 0.935 | 0.873 | 0.816 |
| Present value of cash flows | $(750,000) | $305,745 | $242,694 | $266,832 |
| Net present value | $65,271 | ? | ? | ? |
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