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4 March, 01:19

Haroldsen Corporation is considering a capital budgeting project that would require an initial investment of $350,000. The investment would generate annual cash inflows of $133,000 for the life of the project, which is 4 years. At the end of the project, equipment that had been used in the project could be sold for $32,000. The company's discount rate is 14%. The net present value of the project is closest to: Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor (s) using the tables provided. Multiple Choice $214,000 $37,429 $56,373 $406,373

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Answers (2)
  1. 4 March, 01:39
    0
    The correct answer is option C.

    Explanation:

    Giving the following information:

    The initial investment of $350,000. The investment would generate annual cash inflows of $133,000 for the life of the project, which is 4 years. At the end of the project, equipment that had been used in the project could be sold for $32,000. The company's discount rate is 14%.

    We need to use the following formula:

    NPV = - Io + [Cf / (1+i) ^n]

    Io = 350,000

    1 = 133,000/1.14

    2 = 133,000/1.14^2

    3 = 133,000/1.14^3

    4 = 165,000/1.14^4

    NPV = $56,470.31
  2. 4 March, 02:59
    0
    The answer is: $56,373.

    Explanation:

    The project net present value is equals to the sum of:

    + Initial cash outflow: $ (350,000);

    + Present value of the annuity lasting for 4 years, with annual cash inflow of 133,000, discounted at required return rate of 14%; calculated as: 133,000/14% * [ 1 - 1.14^ (-4) ] = $387,524;

    + Present value of equipment recovery at the end of year 4: 32,000/1.14^4 = $18,946.

    => Project net present value = - 350,000 + 387,524 + 18,946 = $56,470.

    So, its net present value is closest to $56,373.
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Home » Business » Haroldsen Corporation is considering a capital budgeting project that would require an initial investment of $350,000. The investment would generate annual cash inflows of $133,000 for the life of the project, which is 4 years.
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