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 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 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.) et present value

Explanation / Answer

Net present value of the investment opportunity is as calculated below:

Investment opportunity Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Total Purchase of new equipment (a) -430,000 -430,000 Major Overhaul Cost (b) -28,000 -28,000 Working capital Required (c) -80,000 80,000 0 Annual operating cash flows: Sales Revenue 550,000 550,000 550,000 550,000 550,000 Less: Variable expense -280,000 -280,000 -280,000 -280,000 -280,000 Less: Fixed out of pocket expenses -120,000 -120,000 -120,000 -120,000 -120,000 Net Income 150,000 150,000 150,000 150,000 150,000 Less: tax (30%) 45000 45000 45000 45000 45000 Income after tax 105,000 105,000 105,000 105,000 105,000 Add: Depreciation saving (430,000/5)*.3 25800 25800 25800 25800 25800 Annual operating cash flows (d) 130,800 130,800 130,800 130,800 130,800 654,000 Net Flow (a+b+c+d) -510,000 130,800 102,800 130,800 130,800 210,800 196,000 Discount rate 12% 1 0.893 0.797 0.712 0.636 0.567 Present value of cash flow -510,000 116,786 81,952 93,101 83,126 119,614 -15,423 NPV -510,000 116,786 81,952 93,101 83,126 119,614 -15,423

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