1. Calculate the annual income tax expense for each of years 1 through 5 arising from this investment opportunity. 2. Calculate the net present value of this investment opportunity. Note: Negative amounts should be indicated by a minus sign. Round your final answer to the nearest whole dollar.
1. Calculate the annual income tax expense for each of years 1 through 5 arising from this investment opportunity. 2. Calculate the net present value of this investment opportunity. Note: Negative amounts should be indicated by a minus sign. Round your final answer to the nearest whole dollar.
Chapter9: Capital Budgeting Techniques
Section: Chapter Questions
Problem 7PROB
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Transcribed Image Text:Problem 14C-3 (Algo) Income Taxes and Net Present Value Analysis [LO14-8)
Lander Company has an opportunity to pursue a capital budgeting project with a five-year time horizon. Lander estimated the
following costs and revenues for the project:
Cost of equipment needed
Working capital needed
Repair of the equipment in two years
Annual revenues and costs:
Sales revenues
Variable expenses
Fixed out-of-pocket operating costs
$ 420,000
$ 79,000
$ 27,500
$ 540,000
$ 275,000
$ 118,000
The piece of equipment mentioned above has a useful life of five years and zero salvage value. Lander uses straight-line depreciati
for financial reporting and tax purposes. The company's tax rate is 30% and its after-tax cost of capital is 10%. When the project
concludes in five years, the working capital will be released for investment elsewhere within the company.
Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables.
1. Income tax expense
Year 1
Year 2
Year 3
Required:
from this investment opportunity.
1. Calculate the annual income tax expense for each of years 1 through 5 arising
2. Calculate the net present value of this investment opportunity.
Note: Negative amounts should be indicated by a minus sign. Round your final answer to the nearest whole dollar.
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