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 Repair the equipment in two years Annual revenues and costs: Sales revenues Variable expenses Fixed out-of-pocket operating costs $ 250,000 $ 60,000 $ 18,000 $ 350,000 $ 180,000 $ 80,000 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 148-1 and Exhibit 148-2, to determine the appropriate discount factor(s) using tables. 1. Income tax expense Year 11 Year 2 Year 3 Year 4 Year 5 2. Net present value. Required: . Calculate the annual income tax expense for each of years 1 through 5 that will arise as a result of this investment opportunity. 2. Calculate the net present value of this investment opportunity. (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. After careful study, Lander estimated the following costs and revenues for the project: Cost of equipment needed Working capital needed Repair the equipment in two years Annual revenues and costs: Sales revenues Variable expenses Fixed out-of-pocket operating costs $ 250,000 $ 60,000 $ 18,000 $ 350,000 $ 180,000 $ 80,000 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 148-1 and Exhibit 148-2, to determine the appropriate discount factor(s) using tables. 1. Income tax expense Year 11 Year 2 Year 3 Year 4 Year 5 2. Net present value. Required: . Calculate the annual income tax expense for each of years 1 through 5 that will arise as a result of this investment opportunity. 2. Calculate the net present value of this investment opportunity. (Negative amounts should be indicated by a minus sign. Round your final answer to the nearest whole dollar.)
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
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text: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
Repair the equipment in two years
Annual revenues and costs:
Sales revenues
Variable expenses
Fixed out-of-pocket operating costs
$ 250,000
$ 60,000
$18,000
$ 350,000
$ 180,000
$80,000
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 148-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables.
1. Income tax expense
Year 11
Year 2
Year 3
Year 4
Year 5
2. Net present value
Required:
h. Calculate the annual income tax expense for each of years 1 through 5 that will arise as a result of this investment opportunity.
2. Calculate the net present value of this investment opportunity. (Negative amounts should be indicated by a minus sign. Round
your final answer to the nearest whole dollar.)
Ch
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