(Appendix 13C) Donayre Corporation Is Considering a Capital Budgeting Project

question 37

Multiple Choice

(Appendix 13C) Donayre Corporation is considering a capital budgeting project that would require investing $160,000 in equipment with an expected life of 4 years and zero salvage value. Annual incremental sales would be $450,000 and annual incremental cash operating expenses would be $320,000. The project would also require a one-time renovation cost of $70,000 in year 3. The company's income tax rate is 35% and its after-tax discount rate is 7%. The company uses straight-line depreciation. 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 total cash flow net of income taxes in year 2 is:

• A) $90,000
• B) $130,000
• C) $98,500
• D) $53,000

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Definitions:

Aquifers

Underground layers of water-bearing permeable rock, rock fractures, or unconsolidated materials from which groundwater can be extracted.

Coal

A combustible black or brownish-black sedimentary rock used primarily as a fuel in electricity generation.

Nuclear Energy

Energy released during nuclear fission or fusion, especially when used to generate electricity.

Electricity

A form of energy resulting from the existence of charged particles such as electrons or protons, characterized by its ability to perform work, such as powering electrical devices.