Corporate Finance Reading 28: Capital Budgeting Q&A 1 FITCO is considering the purchase of new equipment.

The equipment costs $350,000 and an additional $110,000 is needed to install it. The equipment will be depreciated straight line to zero over a five-year life. The equipment will generate additional annual revenues of $265,000, and it will have annual cash operating expenses of 83,000. The equipment will be sold for $85,000 after five years. An inventory investment of 73,000 is required during the life of the investment. FITCO is in the 40 percent tax bracket and its cost of capital is 10 percent. What is the project NPV? A. $52,122. B. $64,090. C. $97449. Correct answer: C Outlay = FClnv + NWClnv Sal0 + T (Sal0 B0) Outlay = (350,000+110,000)+73,000-0+0=533,000 The installed cost is $350,000+$110,000=$460,000, so the annual depreciation is $460,000/5= $92,000. The annual after-tax operation cash flow for year 1-5 is CF=(265,000-83,000-92,000)(1-0.40)+92000 CF=$146,000 The terminal year after-tax non-operating cash flow in Year5 is TNOCF=Sal5+NWClnv-T(Sa15-B5)=85,000+73,000-0.40(85,000) TNOCF=$124,000 The NPV is NPV= 146,000 + 124,000 = $97,449 1.10t 1.105