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 $380,000 Cost of equipment needed Working capital needed Overhaul of the equipment in two years Annual revenues and costs Sales revenues Variable expenses Fixed out-of-pocket operating costs 75,000 $ 25,500 $500,000 $255,000 $110,000 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 1 1% 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.) et present value

Explanation / Answer

NPV is -$11,214

1 2 3 4 5 6 7 8 9 10 11 12 13 14 Year Cost Working capital Overhaul Revenue Variable cost Fixed cost Depreciation-cost/5 Profit before tax (4+5+6+7+8) Tax-40% on 9 Profit after tax(9-10) Cash flows (1+2+11-8) Discount factor @11% Present value (12*13) 0 $ (380,000) $             (75,000) $ (455,000)                     1.000 $       (455,000) 1 $ 500,000 $     (255,000) $ (110,000) $       (76,000) $                 59,000 $ 23,600 $ 35,400 $   111,400                     0.901 $         100,371 2 $ (25,500) $ 500,000 $     (255,000) $ (110,000) $       (76,000) $                 33,500 $ 13,400 $ 20,100 $      96,100                     0.812 $            78,033 3 $ 500,000 $     (255,000) $ (110,000) $       (76,000) $                 59,000 $ 23,600 $ 35,400 $   111,400                     0.731 $            81,433 4 $ 500,000 $     (255,000) $ (110,000) $       (76,000) $                 59,000 $ 23,600 $ 35,400 $   111,400                     0.659 $            73,413 5 $               75,000 $ 500,000 $     (255,000) $ (110,000) $       (76,000) $                 59,000 $ 23,600 $ 35,400 $   186,400                     0.593 $         110,535 NPV $         (11,214)

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