Rosman Company has an opportunity to pursue a capital budgeting project with a f
ID: 2468447 • Letter: R
Question
Rosman Company has an opportunity to pursue a capital budgeting project with a five-year time horizon. After careful study, Rosman estimated the following costs and revenues for the project:
The new piece of equipment mentioned above has a useful life of five years and zero salvage value. The old piece of equipment mentioned above would be sold at the beginning of the project and there would be no gain or loss realized on its sale. Rosman uses the straight-line depreciation method for financial reporting and tax purposes. The company’s tax rate is 30% and its aftertax 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. (Round discount factor(s) to 3 decimal places. Round your other intermediate calculations to nearest whole dollar.)
Rosman Company has an opportunity to pursue a capital budgeting project with a five-year time horizon. After careful study, Rosman estimated the following costs and revenues for the project:
Explanation / Answer
Year 0 1 2 3 4 5 NPV Cost of equipment $ -4,20,000.00 working capital $ -65,000.00 Sale of old equipment $ 80,000.00 Sales revenue $ 4,10,000.00 $ 4,10,000.00 $ 4,10,000.00 $ 4,10,000.00 $ 4,10,000.00 Variable expenses $ -1,75,000.00 $ -1,75,000.00 $ -1,75,000.00 $ -1,75,000.00 $ -1,75,000.00 Fixed operating costs $ -1,00,000.00 $ -1,00,000.00 $ -1,00,000.00 $ -1,00,000.00 $ -1,00,000.00 Manitenance costs $ -20,000.00 $ -20,000.00 Depreciation $ -84,000.00 $ -84,000.00 $ -84,000.00 $ -84,000.00 $ -84,000.00 Profit before tax $ 51,000.00 $ 51,000.00 $ 31,000.00 $ 31,000.00 $ 51,000.00 tax @ 30% $ -15,300.00 $ -15,300.00 $ -9,300.00 $ -9,300.00 $ -15,300.00 Income after Tax $ 35,700.00 $ 35,700.00 $ 21,700.00 $ 21,700.00 $ 35,700.00 Depreciation (non cash expense) $ 84,000.00 $ 84,000.00 $ 84,000.00 $ 84,000.00 $ 84,000.00 Recovery of working capital $ 65,000.00 Net cash flow $ -4,05,000.00 $ 1,19,700.00 $ 1,19,700.00 $ 1,05,700.00 $ 1,05,700.00 $ 1,84,700.00 Discount Factor @12% 1 0.893 0.797 0.712 0.636 0.567 PV of cash flows $ -4,05,000.00 $ 1,06,892.00 $ 95,401.00 $ 75,258.00 $ 67,225.00 $ 1,04,725.00 $ 44,501.00 Note: as the old machine has been sold at no profit no gain there will be no tax expense or tax advantage on selling the machine Depreciation = 420000/5 = $84000 per year Maintenace costs are revenue expenditures and hence deducted from sales to arrive at the taxable net profit
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