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 Overhaul of the equipment in two $430,000 $80,000 $ 28,000 years Annual revenues and costs: Sales revenues Variable expenses Fixed out-of-pocket operating $550,000 $280,000 costs 120,000 The piece of equipment mentioned above has a useful lite of tive 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 12%, 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. Round your final answer to nearest whole dollar.) Net present value

Explanation / Answer

Step - 1 Compute the investment at t = 0

Step - 2 computing the annual cash inflow

Note : for 5th year annual cash flow shall be 130800 + 80000 ( working capital recovery) = 210,800

Step - 3 Calculation of NPV

NPV = - 15,422 ........... Final answer

Cost of equipment needed 430000 Working capital needed 80000 Overhaul   ( 28000 * 0.797194) 22321 Total Investment   ( t = 0) 532321

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