Chene Corporation Has Provided the Following Information Concerning a Capital

question 48

Multiple Choice

Chene Corporation has provided the following information concerning a capital budgeting project: The equipment will have a 4 year expected life and zero salvage value. The company's income tax rate is 30%, and the after-tax discount rate is 10%. The company uses straight-line depreciation on all equipment; the annual depreciation expense will be $50,000. 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.
Use Exhibit 7B-1 to determine the appropriate discount factor(s) using table.
The net present value of the project is closest to:

• A) $335,914
• B) $224,000
• C) $169,516
• D) $135,914

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Definitions:

Amortized Cost

Amortized cost is an investment's acquisition cost adjusted for amortization, impairment charges, and any accumulated payment or receipts since acquisition.

Market Value

The market's current rate for buying or selling an asset or service.

Available-for-Sale Investments

These are securities that are not classified as held-to-maturity or trading securities, and can be sold in the future.

Common Stock

Equity ownership in a corporation, providing voting rights and a share in the company’s profits through dividends.