Dunstan Corporation Is Considering a Capital Budgeting Project That Involves

question 215

Essay

Dunstan Corporation is considering a capital budgeting project that involves investing $450,000 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 $220,000 per year. The company uses straight-line depreciation and the depreciation expense on the equipment would be $150,000 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 11%.Click here to view Exhibit 14B-1, to determine the appropriate discount factor(s) using the table provided.Required:Determine the net present value of the project. Show your work!

---

Definitions:

Mean Squares

The average of the squares of the deviations or differences from the mean, often used in variance analysis.

Sum of Squares

A statistical measure used in regression analysis and ANOVA; it quantifies the total variance in the data by summing squared deviations from the mean.

Significance Level

The potential of mistakenly refuting the null hypothesis during a statistical inquiry, typically shown by the alpha symbol.

Significance Level

The threshold used to determine the probability of rejecting the null hypothesis, often denoted by alpha (\(\alpha\)).