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

question 77

Essay

(Appendix 8C)Hohlfeld Corporation is considering a capital budgeting project that would require investing $80, 000 in equipment with a 4 year useful life and zero salvage value.Annual incremental sales would be $240, 000 and annual incremental cash operating expenses would be $180, 000.An investment of $20, 000 in working capital would be required immediately and would be released for use elsewhere at the end of the project.The company uses straight-line depreciation on all equipment.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 company's tax rate is 30% and the after-tax discount rate is 9%.
Required:
Determine the net present value of the project.Show your work!

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Definitions:

Budget Constraints

The limitations on the consumption bundles that a consumer can afford given their income and the prices of goods and services.

Utility

A measure of satisfaction or pleasure derived from consuming products or services.

Money Income

The total amount of monetary earnings received by an individual or household, including wages, salaries, investments, and other income sources.

Coke

A carbonized material derived from coal used mainly in steel production, or a trademark for a popular carbonated soft drink.