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Hayden Matthews
on Nov 19, 2024

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Donayre Corporation is considering a capital budgeting project that would require investing $160,000 in equipment with an expected life of 4 years and zero salvage value. Annual incremental sales would be $450,000 and annual incremental cash operating expenses would be $320,000. The project would also require a one-time renovation cost of $70,000 in year 3. The company's income tax rate is 30% and its after-tax discount rate is 7%. The company uses straight-line depreciation. 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 total cash flow net of income taxes in year 2 is:

A) $91,000
B) $130,000
C) $103,000
D) $63,000

Incremental Sales

Additional sales generated by a new promotional strategy or marketing campaign, beyond the expected or normal sales volume.

Operating Expenses

Costs that a business incurs through its normal business operations, excluding the cost of goods sold.

Renovation Cost

Expenses incurred in updating or improving a fixed asset, such as buildings or equipment, to increase its value or extend its useful life.

  • Employ discount rates concerning cash flows to figure the current value in capital budgeting pursuits.
  • Analyze the financial desirability of investment ventures, taking into account variables such as intangible rewards, taxation effects, remodeling costs, and depreciation effects.
  • Calculate prospective cash inflow and outflow accompanying investment activities.
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Royston DsouzaNov 22, 2024
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