PROBLEM 8C-3 Income Taxes and Net Present Value Analysis [LO 8-8] 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: outlays for Cost of equipment needed Working capital needed Overhaul of 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 Required: Calculate the net present value of this investment opportunity. $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.
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
![PROBLEM 8C-3 Income Taxes and Net Present Value Analysis [LO 8-8]
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:
outlays for
Cost of equipment needed
Working capital needed
Overhaul of 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
Required:
Calculate the net present value of this investment opportunity.
$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.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F8653ed54-e851-4b19-b657-c934170fa6d8%2F67fca0bf-901b-4e50-a040-c8fbb3b0c1a3%2Fb7k4pnj_processed.png&w=3840&q=75)
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