Calculate the NPV for the Following Capital Budgeting Proposal: $100,000

question 31

Essay

Calculate the NPV for the following capital budgeting proposal: $100,000 initial cost for equipment, straight-line depreciation over 5 years to a zero book value, $5,000 pre-tax salvage value of equipment, 35% tax rate, $45,000 additional annual revenues, $15,000 additional annual cash expenses, $8,000 initial investment in working capital to be recouped at project end, and a cost of capital of 11%. Should the project be accepted or rejected? (Show your work computing the NPV.)

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Definitions:

Expected Return

The anticipated profit or loss from an investment, taking into account the possibility of various outcomes.

Standard Deviation

A parameter that assesses the extent of difference or range within a batch of numerical values.

Risk-Averse Investor

An investor who prefers lower returns with known risks rather than higher returns with unknown risks.

Slope of the Budget Line

The rate at which one good can be traded for another, reflecting the relative prices of two goods.