(Appendix 8C)Kostka Corporation Is Considering a Capital Budgeting Project That

question 58

Multiple Choice

(Appendix 8C) Kostka 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 $480, 000 and annual incremental cash operating expenses would be $330, 000.The project would also require an immediate investment in working capital of $20, 000 which would be released for use elsewhere at the end of the project.The project would also require a one-time renovation cost of $0 in year 3.The company's income tax rate is 30% and its after-tax discount rate is 9%.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 net present value of the entire project is closest to:

• A)$213, 123
• B)$198, 963
• C)$308, 000
• D)$320, 010

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Definitions:

Inventory

The total amount of goods and materials held by a company for the purpose of resale or production.

Cash Paid

The total amount of cash disbursed by a company for various purposes, including operating expenses, investing activities, and financing activities.

Suppliers

Entities that provide goods or services to another organization, typically part of the supply chain or production process of a company's products.

Indirect Method

A technique for preparing the cash flow statement in which net income is adjusted for non-cash transactions and changes in working capital to reflect cash flow from operating activities.