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thus reported accounting income should be used as the basis for investor
and managerial decisions.
c. It is unrealistic to believe that any increases in net working capital
required at the start of an expansion project can be recovered at the
project’s completion. Working capital like inventory is almost always
used up in operations. Thus, cash flows associated with working capital
should be included only at the start of a project’s life.
d. If equipment is expected to be sold for more than its book value at the
end of a project’s life, this will result in a profit. In this case, despite
taxes on the profit, the end-of-project cash flow will be greater than if
the asset had been sold at book value, other things held constant.
e. Changes in net working capital refer to changes in current assets and
current liabilities, not to changes in long-term assets and liabilities.
Therefore, changes in net working capital should not be considered in a
capital budgeting analysis.
4. Temple Corp. is considering a new project whose data are shown
below. The equipment that would be used has a 3-year tax life, would be
depreciated by the straight-line method over its 3-year life, and would
have a zero salvage value. No new working capital would be required.
Revenues and other operating costs are expected to be constant over the
project’s 3-year life. What is the project’s NPV?
Risk-adjusted WACC 10.0%
Net investment cost (depreciable basis) $65,000
Straight-line deprec. rate 33.3333%