Shanks Corporation Is Considering a Capital Budgeting Project That Involves

question 11

Essay

Shanks Corporation is considering a capital budgeting project that involves investing $600,000 in equipment that would have a useful life of 3 years and zero salvage value. The company would also need to invest $20,000 immediately in working capital which would be released for use elsewhere at the end of the project in 3 years. The net annual operating cash inflow, which is the difference between the incremental sales revenue and incremental cash operating expenses, would be $300,000 per year. The project would require a one-time renovation expense of $60,000 at the end of year 2. The company uses straight-line depreciation and the depreciation expense on the equipment would be $200,000 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 income tax rate is 30%. The after-tax discount rate is 15%.
Required:
Determine the net present value of the project. Show your work!

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Definitions:

Minority Shareholders

Investors who own less than 50% of a company's shares, and typically have limited influence over company decisions.

State Corporate Statutes

Laws enacted by states governing the formation, operation, and dissolution of corporations within that state.

Fiduciary Duty

An obligation to act in the best interest of another party, such as the relationship between a trustee and the beneficiaries of the trust.

Breach of Fiduciary Duty

Occurs when an individual in a trusted position fails to act in the best interests of another party whom he or she has a duty to.