value: 1.50 points Winthrop Company has an opportunity to manufacture and sell a

Question

value: 1.50 points Winthrop Company has an opportunity to manufacture and sell a new product for a five-year period. To pursue this opportunity, the company would need to purchase a piece of equipment for $140,000. The equipment would have a useful life of five years and zero salvage value. It would be depreciated for financial reporting and tax purposes using the straight-line method. After careful study, Winthrop estimated the following annual costs and revenues for the new product: Annual revenues and costs Sales revenues Variable expenses Fixed out-of-pocket operating costs 270,000 $ 130,000 $ 72,000 The company's tax rate is 30% and its after-tax cost of capital is 15%. Click here to view Exhibit 8B-1 and Exhibit 8B-2, to determine the appropriate discount factor(s) using tables. Required Calculate the net present value of this investment opportunity. (Round discount factor(s) to 3 decimal places. Round your final answer to nearest whole dollar.) Net nt value

Explanation / Answer

Sales revenue 270000 Costs: Variable expenses 130000 Fixed costs 72000 Depreciation expense 28000 =(140000/5) Profit before tax 40000 Less: Tax expense 12000 Profit aftex tax 28000 Add: Depreciation 28000 Net annual cash flows 56000 Net present value=(56000*3.352)-140000= $47712

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