Gaston Company is considering a capital budgeting project that would require a $

Question

Gaston Company is considering a capital budgeting project that would require a $2,700,000 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: Sales Variable expenses $3,100,000 1,510,000 1,590,000 Contribution margin Fixed expenses: Advertising, salaries, and other fixed S650 000 out-of-pocket costs Depreciation 540,000 Total fixed expenses 1,190,000 Net operating income S 400,000 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.) Net present value

Explanation / Answer

Annual cash flow Net operating income 400,000 less:Tax @30% 120000 income after tax 280,000 hence annual cash flow will be income after tax 280,000 Add:Depreciation (non cash item) 540,000 Annual cash flow 820,000 Calculation of net present value year o yr 1----5 yr Description amount invested -2,700,000 annual cash flow 820,000 net cash flow -2,700,000 820,000 discount factor (13%) 1 3.517 present value -2700000 2883940 183940 net present value 183,940 net present value 183,940 answer

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