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

question 103

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 3 is:

• A) $53,000
• B) $60,000
• C) $28,500
• D) $98,500

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Definitions:

Salt

A general term for ionic compounds that result from the neutralization reaction of an acid and a base, commonly used as sodium chloride in cooking.

Sodium Chloride

A compound commonly known as table salt, consisting of sodium and chloride ions.

Na

Na is the chemical symbol for Sodium, a highly reactive, silver-colored metal belonging to the alkali metal series, with atomic number 11.

Neutralization

A chemical reaction in which an acid and a base react quantitatively to form water and a salt, effectively balancing the acid and base.