Question
In: Accounting
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 agoRelated Solutions
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
$
380,000
Working capital needed
$
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Repair the equipment in two years
$
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Annual revenues and costs:
Sales revenues
$
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Variable expenses
$
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Fixed out-of-pocket operating costs
$
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The piece of equipment mentioned above has a useful life of five
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Lander Company has an opportunity to pursue a capital budgeting project with a five-year time horizon....
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Cost of equipment needed
$
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Working capital needed
$
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Repair the equipment in two
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$
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Annual revenues and costs:
Sales revenues
$
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Variable expenses
$
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Fixed out-of-pocket operating
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$
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