Gaston Company is considering a capital budgeting project that would require a $
ID: 2470954 • Letter: G
Question
Gaston Company is considering a capital budgeting project that would require a $2,600,000 investment in equipment with a useful life of five years and no salvage value. The company's tax rate is 30% and its after-tax cost of capital is 13%. It uses the straight-line depreciation method for financial reporting and tax purposes. The project would provide net operating income each year for five years as follows: Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables. Required: Compute the project's net present value. (Round discount factor(s) to 3 decimal places.)Explanation / Answer
Ans-
Year 1 2 3 4 5 Revenue inflows 3,300,000 3,300,000 3,300,000 3,300,000 3,300,000 Costs outflows(Variable+fixed excluding dep.) – 2,400,000 2,400,000 2,400,000 2,400,000 2,400,000 Before-tax net cash flows 900,000 900,000 900,000 900,000 900,000 Depreciation – 520,000 520,000 520,000 520,000 520,000 Income before taxes 380,000 380,000 380,000 380,000 380,000 Taxes @ 30% – 114,000 114,000 114,000 114,000 114,000 After-tax net income 266,000 266,000 266,000 266,000 266,000 Depreciation + 520,000 520,000 520,000 520,000 520,000 After-tax cash flows 786,000 786,000 786,000 786,000 786,000 After-tax salvage value + - - - - - After-tax total net cash flows 786,000 786,000 786,000 786,000 786,000 Discount rate @ 13% 1 1 1 1 1 PV 695,531 615,517 544,698 482,054 426,602 Total present value 2,764,401 Initial investment - 2,600,000 NPV 164,401 Depriciation Investment 2,600,000 Life (Years) 5 Salvage value 0 Investment-Salvage Value/Life 2,600,000-0/5 $520,000Related Questions
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