Anthony Companyâs capital budgeting committee is evaluating acapital expenditure proposal for the production of a highdefinition television receiver to be sold as an add-on feature forpersonal computers. The proposal calls for an independentcontractor to construct the necessary facilities by December 31,2014, at a total cost of $250,000. Payment for all constructioncosts will be made on that date. An additional $50,000 in cash willalso be made available on December 31, 2014, for working capital tosupport sales and production activities. Management anticipatesthat the receiver has a limited market life; there is a highprobability that by 2021 all new PCs will have built-in highdefinition receivers. Accordingly, the proposal specifies thatproduction will cease on December 31, 2020. The investment inworking capital will be recovered on that date, and the productionfacilities will be sold for $30,000. Predicted net cash inflowsfrom operations for 2015 through 2020 are as follows:
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$100,000
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .100,000
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .100,000
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40,000
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40,000
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40,000
Anthony Company has a time value of money of 14 percent. Forcapital budgeting purposes, all cash flows are assumed to occur atthe end of each year. Page 2 of 4 Required
a. Evaluate the capital expenditure proposal using the netpresent value method. Should Anthony accept the proposal?
b. Assume that the capital expenditure proposal is accepted, butconstruction delays caused by labor problems and difficulties inobtaining the necessary construction permits delay the completionof the project. Payments totaling $200,000 were made to theconstruction company on December 31, 2014, for that yearâsconstruction. However, completion is now scheduled for December 31,2015, and an additional $100,000 will be required to completeconstruction. If the project is continued, the additional $100,000will be paid at the end of 2015, and the plant will beginoperations on January 1, 2016. Because of the cost overruns, thecapital budgeting committee requests a reevaluation of the projectin early 2015, before agreeing to any additional expenditures.After much effort, the following revised predictions of netoperating cash inflows are developed:
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . .$120,000
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . .100,000
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40,000
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40,000
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40,000
The working capital investment and disinvestment and the plantsalvage values have not changed, except that the cash for workingcapital would now be made available on December 31, 2015. Use thenet present value method to reevaluate the initial decision toaccept the proposal. Given the information currently availableabout the project, should it have been accepted in 2014? (Hint:Determine the net present value as of December 31, 2014, assumingmanagement has not committed Anthony to the proposal.)
c. Given the situation that exists in early 2015, shouldmanagement continue or cancel the project? Assume that thefacilities have a current salvage value of $50,000. (Hint: Assumethat the decision is being made on January 1, 2015.)
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