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

question 109

Essay

(Appendix 8C)Ferriman Corporation is considering a capital budgeting project that involves investing $600, 000 in equipment that would have a useful life of 3 years and zero salvage value.The company would also need to invest $40, 000 immediately in working capital which would be released for use elsewhere at the end of the project in 3 years.The net annual operating cash inflow, which is the difference between the incremental sales revenue and incremental cash operating expenses, would be $300, 000 per year.The company uses straight-line depreciation and the depreciation expense on the equipment would be $200, 000 per year.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 income tax rate is 30%.The after-tax discount rate is 10%.
Required:
Determine the net present value of the project.Show your work!

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Definitions:

EBIT

A financial metric that measures a firm's profit from its usual business operations, essentially its earnings before deducting interest and taxes.

EBIT-EPS Analysis

A tool used in financial analysis to determine the impact of leverage on a company's earnings per share (EPS) by holding earnings before interest and taxes (EBIT) constant.

Leverage Levels

The degree to which a business or investor is utilizing borrowed money.

EPS

Earnings Per Share, a company's profit divided by its number of outstanding shares of common stock, indicating how much money each share earns.