Lander Company has an opportunity to pursue a capital budgeting project with a f
ID: 2568724 • Letter: L
Question
Lander Company has an opportunity to pursue a capital budgeting project with a five-year time horizon. After careful study, Lander estimated the following costs and revenues for the project:
116,000
The piece of equipment mentioned above has a useful life of five years and zero salvage value. Lander uses straight-line depreciation for financial reporting and tax purposes. The company’s tax rate is 30% and its after-tax cost of capital is 12%. When the project concludes in five years the working capital will be released for investment elsewhere within the company.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
Calculate the net present value of this investment opportunity. (Negative amounts should be indicated by a minus sign. Round discount factor(s) to 3 decimal places. Round your final answer to nearest whole dollar.)
Lander Company has an opportunity to pursue a capital budgeting project with a five-year time horizon. After careful study, Lander estimated the following costs and revenues for the project:
Explanation / Answer
Annual Cash inflows for first and 2 nd year Sales revenue 530,000 Less: Variable cost 270,000 Less: Fixed operating expense 116,000 Less: Annual depreciation (410,000 /5) 82,000 Net operating income before tax 62,000 Less: Tax @30% 18600 Net Income after tax 43,400 Add: Annual depreciation 82000 Annual cahs inflows for first and second year 125,400 Annual cash inflows for third, fourth and fifth year Sales revenue 530,000 Less: Variable cost 270,000 Less: Fixed operating expense 116,000 Less: Annual depreciation (410,000 /5) 82,000 Less: Additional dep on overhaaling(27000/3) 9,000 Net operating income before tax 53,000 Less: Tax @30% 15900 Net Income after tax 37,100 Add: Annual depreciation(82000+9000) 91000 Annual cahs inflows for first and second year 128,100 Present value of cash inflows for five years Annual cash inflows for first and second ($ 125,400 with PV factor @12@ i.e. 0.893+0.797) 211926 Annual Cash inflows for 3,4 and 5th year ($128,100 with pv factor i.e. 0.712+0.636+0.567) 245311.5 Investment in working capital realised at the end of 5th year(78,000 with PV factor of 5th yr i.e. 0.567) 44226 Present value of cash inflows 501463.5 Present value of cash outflows: Present valueof initial investment in cost of equipment 410,000 present value of wortking capital investment 78,000 Presetn value of overhauling cost at the end of second year (27,000 with PV factor of 2 nd year i.e. 0.797) 21519 Present value of cash outflows 509519 Net Present value -8055.5
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