Gaston Company is considering a capital budgeting project that would require a $
ID: 2615256 • Letter: G
Question
Gaston Company is considering a capital budgeting project that would require a $2,300,000 investment in equipment with a useful life of five years and no salvage value. The company's tax rate is 30% and its after-tax cost of capital is 13%. It uses the straight-line depreciation method for financial reporting and tax purposes. The project would provide net operating income each year for five years as follows: Sales Variable expenses $3,100,000 1,690,000 Contribution margin Fixed expenses: Advertising, salaries, and 1,410,000 9S res.enost530000 other fixed out-of-pocket costs Depreciation 460,000 Total fixed expenses 990,000 Net operating income $ 420,000Explanation / Answer
Calculation of net present value of project :-
Net present value (NPV) = Present value of cash inflows of project - Present value of cash outflow of project
Annual cash flows = Sales - Variable cost - Out-of-pocket costs (Advertising, salaries, and other fixed out-of-pocket costs) - Tax (30%)
= (3,100,000 - 1,690,000 - 530,000) - [880000 - 460000]*0.30
= 880000 - 126000
= 754000
Undiscounted Cash Flows Annual Cash Inflows 754000 Formula Inputs RATE 13% NPER 5 PMT 754000 NPV Calculation Present value of cash Inflows 2651992 Cost of Machine 2300000 Net present Value 351992Related Questions
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