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 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.

A) $214,000
B) $37,429
C) $56,373
D) $406,373

Question

Brady Johnson · Accepted Answer

Final Answer : C, Explanation :  To calculate the net present value (NPV), we need to calculate the present value (PV) of the cash inflows and outflows. Using Exhibit 14B-1 and 14B-2, we can find the discount factor for each year at a 14% discount rate.PV of cash inflows:Year 1: $133,000 x 0.877 = $116,641Year 2: $133,000 x 0.769 = $102,477Year 3: $133,000 x 0.675 = $89,776Year 4: $133,000 x 0.592 = $78,856Total PV of cash inflows: $388,750PV of initial investment: -$350,000PV of salvage value: $32,000 x 0.592 = $18,944NPV = PV of cash inflows - PV of initial investment + PV of salvage valueNPV = $388,750 - $350,000 + $18,944NPV = $56,373Therefore, the net present value of the project is closest to $56,373. Choice C is the correct answer.

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