Lander Company has an opportunity to pursue a capital budgeting project with a five-year time horizon....

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:


Cost of equipment needed	$	280,000
Working capital needed	$	65,000
Repair the equipment in two years	$	20,500
Annual revenues and costs:
Sales revenues	$	400,000
Variable expenses	$	205,000
Fixed out-of-pocket operating costs	$	90,000

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 40% 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.

Required:

1. Calculate the annual income tax expense for each of years 1 through 5 that will arise as a result of this investment opportunity.

2. Calculate the net present value of this investment opportunity. (Negative amounts should be indicated by a minus sign. Round your final answer to nearest whole dollar.)

Solutions

Expert Solution

1			Year 1	Year 2	Year 3	Year 4	Year 5
	Sales (A)		400000	400000	400000	400000	400000
	Less: costs
	Variable expenses		205000	205000	205000	205000	205000
	Fixed out-of-pocket operating costs		90000	90000	90000	90000	90000
	Repairs		0	20500	0	0	0
	Depreciation	(280000/5)	56000	56000	56000	56000	56000
	Total (B)		351000	371500	351000	351000	351000
	Income before taxes	(A-B)	49000	28500	49000	49000	49000
	Annual income tax expenses @ 40%		19600	11400	19600	19600	19600

2	Net present value		Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
	Income before taxes			49000	28500	49000	49000	49000
	Less: Annual income tax expenses			19600	11400	19600	19600	19600
	Net income			29400	17100	29400	29400	29400
	Add: depreciation			56000	56000	56000	56000	56000
	Annual cash inflow			85400	73100	85400	85400	85400
	Initial investment		-280000
	Working capital		-65000					65000
	Net cashflow		-345000	239400	186100	239400	239400	304400
	Discount factor @12%		1	0.892857	0.797194	0.71178	0.635518	0.567427
	Discounted cashflow		-345000	213750	148358	170400	152143	172725
	Net present value							512376

ekkarill92 answered 11 months ago

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