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

question 86

Essay

(Appendix 8C)Menghini Corporation is considering a capital budgeting project that would require investing $120, 000 in equipment with a 4 year useful life and zero salvage value.Annual incremental sales would be $300, 000 and annual incremental cash operating expenses would be $240, 000.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 6%.
Required:
Determine the net present value of the project.Show your work!

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Definitions:

Equipment

Tangible assets used in operations, such as machinery or office equipment, not intended for sale.

Land

A real estate asset representing a parcel of earth's surface, its resources, and all its permanent fixtures.

Net Sales

Total sales revenue minus returns, discounts, and allowances for goods that are damaged or missing, defining a company's net sales.

Gross Profit

The financial gain obtained after subtracting the cost of goods sold from total sales revenue.