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

question 69

Multiple Choice

(Appendix 8C) Battaglia Corporation is considering a capital budgeting project that would require investing $240, 000 in equipment with an expected life of 4 years and zero salvage value.Annual incremental sales would be $620, 000 and annual incremental cash operating expenses would be $460, 000.The project would also require a one-time renovation cost of $80, 000 in year 3.The company's income tax rate is 30% and its after-tax discount rate is 7%.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)$224, 000
• B)$394, 614
• C)$236, 640
• D)$154, 614

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Definitions:

Premium

An amount paid in addition to the standard price or cost, often in exchange for a service, insurance coverage, or higher-quality good.

Bondholders

Individuals or entities that hold debt securities issued by corporations or governmental bodies, expecting interest payments and the return of principal.

Issuing Corporation

A company or entity that offers its securities for sale to investors to raise capital.

Interest Expense

The cost incurred by an entity for borrowed funds, reflected as a charge against earnings on the income statement.