Sader Corporation Is Considering a Capital Budgeting Project That Would

question 16

Multiple Choice

Sader Corporation is considering a capital budgeting project that would require an investment of $160,000 in equipment with a 4 year expected life and zero salvage value. Annual incremental sales will be $420,000 and annual incremental cash operating expenses will be $320,000. The company's income tax rate is 30% and the after-tax discount rate is 8%. The company uses straight-line depreciation on all equipment; the annual depreciation expense will be $40,000. 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 project is closest to:

• A)$271,584
• B)$111,584
• C)$171,200
• D)$168,000

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Definitions:

Fair Value

An estimate of the market value of an asset or liability, based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Journal Entry

A record in accounting that documents a business transaction in the general ledger, indicating debits and credits to specific accounts.

Consolidation Entries

Journal entries made in the process of preparing consolidated financial statements to eliminate intercompany transactions and balances among the entities of a consolidated group.

Consolidated Financial Statements

Financial statements that present the assets, liabilities, equity, income, expenses, and cash flows of a parent company and its subsidiaries as one single entity.