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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 1 year ago
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