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

question 22

Multiple Choice

(Appendix 8C) Lanfranco 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 $10, 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 $100, 000 in year 3.The company's income tax rate is 35% and its after-tax discount rate is 6%.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 total cash flow net of income taxes in year 3 is:

• A)$46, 500
• B)$11, 500
• C)$111, 500
• D)$50, 000

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Definitions:

Secured

Pertaining to a loan or obligation that is backed by collateral to reduce the risk of lending.

Security Interest

A legal claim or liens on property as collateral for the payment of a debt or performance of some other obligation.

Personal Property

Movable assets or belongings, excluding real estate and buildings, owned by an individual or entity.

Third Parties

Individuals or entities that are not directly involved in a contract or negotiation but may be affected by its outcomes or have an interest in its terms.