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 depreciation 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 Year 4 Year 5 2. Net present value Required: 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.
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 depreciation 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 Year 4 Year 5 2. Net present value Required: 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.
Chapter11: Capital Budgeting And Risk
Section: Chapter Questions
Problem 15P
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Transcribed Image Text: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 depreciation
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
Year 4
Year 5
2. Net present value
Required:
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.
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