Columbus Company Is Considering a Project That Requires an Initial

question 17

Essay

Columbus Company is considering a project that requires an initial investment of $400,000. Its incremental cash flows are expected to be $150,000 per year for five years. The project would be depreciated on a straight-line basis over 5 years with no expected salvage value. The company has a stated policy that all projects must return their required investment dollars within the first 75% of the project's life. The company is subject to a 40% income tax rate, and its cost of capital is 10%.
Required:
1) Compute the project's after-tax net cash flows (NCF) by completing the following table: $$\begin{array} { | c | c | c | c | c | c | } \hline & \text { Cash } & & \text { Taxable } & \text { Cash Outflow } & \text { After-tax } \\\hline \text { Year } & \text { Inflows } & \text { Depreciation } & \text { Income } & \text { for Taxes } & \text { NCF } \\\hline 1.5 & & & & & \\\hline\end{array}$$
2) Compute the project's net present value by completing the following table: $$\begin{array} { | c | c | c | c | } \hline & \text { After-tax } & \text { Present Value } & \text { Total } \\\hline \text { Year } & \text { NCF } & \text { Factor } & \text { Present Value } \\\hline 0 & & & \\\hline 1-5 & & & \\\hline\end{array}$$
3) Compute the project's payback period.
4) Should the project be accepted? Why or why not?

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Definitions:

Entrapment Defense

A legal defense claiming the defendant was induced by law enforcement to commit a crime they otherwise would not have committed.

Entrapment

A relatively common defense under which the defendant claims that he would not have committed the crime or broken the law if he had not been induced or tricked into doing so by law enforcement officials.

Insider Trading

The illegal trading of a public company's stock by someone with access to nonpublic, material information about the company.

Tipping

The practice of giving money, beyond the cost of a service, to certain service workers for a job well done.