Gaston Company is considering a capital budgeting project that would require a $

Question

Gaston Company is considering a capital budgeting project that would require a $2,400,000 investment in equipment with a useful life of five years and no salvage value. The company's tax rate is 30% and its after-tax cost of capital is 16%. It uses the straight-line depreciation method for financial reporting and tax purposes. The project would provide net operating income each year for five years as follows: Click here to view Exhibit 13B-1 and Exhibit 13B-2. to determine the appropriate discount factor(s) using tables. Compute the project's net present value. (Round discount factor(s) to 3 decimal places.)

Explanation / Answer

Solution:

Calculation of Annual net cash flows:

Calculation of Net Present Value:

Net Present Value = 3,077,560 - 2,400,000 = 677,560

Net operating income    460,000 Add: Noncash deduction for depreciation    480,000 Annual net cash inflow    940,000

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