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Is the capital project acceptable to the company and why

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Reference no: EM132501181

Slick Company is considering a capital project involving a $225,000 investment in machinery and a $45,000 investment in working capital. The machine has an expected useful life of 10 years and no salvage value. The annual cash inflows (before taxes) are estimated at $90,000
with annual cash outflows (before taxes) of $30,000. The company uses straight-line depreciation.

Assume the federal income tax rate is 40%. The company's new accountant computed the net present value of the project using a minimum required rate of return of 16% (the company's cost of capital). The accountant's computations follow:

Cash inflows $ 90,000
Cash outflows 30,000
Net cash inflow $ 60,000
Present value factor at 16% X 4.833
Present value of net cash inflow $ 289,980
Initial cash outlay 225,000
Net present value $ 64,980

Question a. Are the accountant's computations correct? If not, compute the correct net present value.

Question b. Is this capital project acceptable to the company? Why or why not?

Reference no: EM132501181

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