Lander Company has an opportunity to pursue a capital budgeting project with a f

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: 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 10%. 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: 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.) Net present value

Explanation / Answer

year cash flow other cash flow tax shield on depreciation total cash flow 0 -499000 -499000 1 88200 33600 121800 2 88200 27500 33600 149300 3 88200 33600 121800 4 88200 33600 121800 5 88200 79000 33600 200800 NPV 34497.8858

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