9 eBook References Gaston Company is considering a capital budgeting project that would require a $2,200,000 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 12%. 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 Contribution margin Fixed expenses: Advertising, salaries, and other fixed out-of- pocket costs Depreciation Total fixed expenses Net operating income before tax $520,000 440,000 $ 3,000,000 1,660,000 1,340,000 960,000 $ 380,000 Required: Compute the project's net present value. Net present value

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Gaston Company is considering a capital budgeting project that would require a $2,200,000 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 12%. 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
Contribution margin
Fixed expenses:
Advertising, salaries, and
other fixed out-of-
pocket costs
Depreciation
Total fixed expenses
Net operating income before
tax
$520,000
440,000
$ 3,000,000
1,660,000
1,340,000
960,000
$ 380,000
Required:
Compute the project's net present value.
Net present value
Transcribed Image Text:9 eBook References Gaston Company is considering a capital budgeting project that would require a $2,200,000 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 12%. 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 Contribution margin Fixed expenses: Advertising, salaries, and other fixed out-of- pocket costs Depreciation Total fixed expenses Net operating income before tax $520,000 440,000 $ 3,000,000 1,660,000 1,340,000 960,000 $ 380,000 Required: Compute the project's net present value. Net present value
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