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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

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 companys new accountant computed the net present value of the project using a minimum required rate of return of 16% (the companys cost of capital). The accountants computations follow:

Cash inflows

$ 90,000

Cash outflows

30,000

Net cash inflow

$ 60,000

Present value factor at 16%

4.833

Present value of net cash inflow

$289,980

Initial cash outlay

225,000

Net present value

$ 64,980

Required:

a. Are the accountants computations correct? If not, compute the correct net present value.

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

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