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: Cost of equipment needed Working capital needed Repair the equipment in two years Annual revenues and costs: sales revenues Variable expenses Fixed out-of-pocket operating costs $250,000 $62,000 $ 19,000e $370,000 $190,000 $ 84,000 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 30% and its after-tax cost of capital is 14%, when the project concludes in five years the working capital will be released for investment elsewhere within the company Click here to view Exhibit 138-1 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.)

Explanation / Answer

1) Income tax expense

2) NPV

Year 1 2 3 4 5 Sales revenues $3,70,000 $3,70,000 $3,70,000 $3,70,000 $3,70,000 Variable expenses $1,90,000 $1,90,000 $1,90,000 $1,90,000 $1,90,000 Fixed operating costs $84,000 $84,000 $84,000 $84,000 $84,000 Depreciation $50,000 $50,000 $50,000 $50,000 $50,000 Repair $0 $19,000 $0 $19,000 $0 Operating income before taxes $46,000 $27,000 $46,000 $27,000 $46,000 Income tax $13,800 $8,100 $13,800 $8,100 $13,800

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