Gaston Company is considering a capital budget ng pro ect that would require a $

Question

Gaston Company is considering a capital budget ng pro ect that would require a $2,000,000 investment in equipment with a useful e of ve years and no sa evalue. The company s ax ates % and after tax cost of capital is 16%. It uses the straight ne depreciation method for financial reporting and tax ur ses. The project would provide net operating i come each year for five years as follows: S Sales Variable expenses Contribution margin Fixed expenses Advertising, salariles, and other fixed out-of-pocket costs $ 3,200,000 1,870,000 1,330,000 590,000 400,000 Depreciation Total fixed expenses Net operating income $ 340,000 Click here to view Exhibit 8B-1 and Exhibit 8B-2, to determine the appropriate discount factor(s) using tables Required: Compute the project's net present value. (Round discount factor(s) to 3 decimal places.) Net present value

Explanation / Answer

Net iNcome after tax =Net operating income (1-tax)

               340000(1-.30)

        = 238000

Annual cash flow =Income after tax+ depreciation (non cash)

   = 238000+400000

= 638000

Present value of annual cash flow =PVA16%,5*Annual cash flow

                  = 3.274*638000

                 = 2,088,812

NPV =present value -Initial cost

     = 2,088,812- 2,000,000

= $ 88,812

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