Capital Budgeting Computations
a Project Costing $80,000 Has an Estimated

question 118

Short Answer

Capital budgeting computations
A project costing $80,000 has an estimated life of 3 years and no salvage value. The estimated net income and net after tax cash flows from the project are as follows:
The company's minimum desired rate of return for discounted cash flow analysis is 10%. The present value of $1 at compound interest of 10% at 1, 2, and 3 years is .909, .826, and .751 respectively. The present value of a $1 annuity for three years at 10% is 2.487. The company uses straight-line depreciation.
Compute
(a) Net present value of the project. _________________________
(b) The rate of return on average investment __________________
Calculations
$$\begin{array} { | c | c | c | } \hline \text { Year } & \text { Net After Tax Income } & \text { Net After Tax Cash Flow } \\\hline 1 & \$ 20,000 & \$ 35,000 \\\hline 2 & 35,000 & 50,000 \\\hline 3 & \underline { 25,000 } & \frac { 45,000 } { } \\\hline & \$ 80,000 & \$ 130,000 \\\hline & & \\\hline\end{array}$$

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