Rosman Company has an opportunity to pursue a capital budgeting project with a five-year time horizon. After careful study, Rosman estimated the following costs and revenues for the project: Cost of new equipment Sale of old equipment no longer needed Annual cash inflows Working capital needed Equipment maintenance in each of Years 3 and 4 $420,000 $ 80,000 $135,000 $ 65,000 $ 20,000 The new piece of equipment mentioned above has a useful life of five years and zero salvage value. The old piece of equipment mentioned above would be sold at the beginning of the project and there would be no gain or loss realized on its sale. Rosman uses the straight-line depreciation method for financial reporting and the CCA rate for tax purposes is 20%. 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.
Rosman Company has an opportunity to pursue a capital budgeting project with a five-year time horizon. After careful study, Rosman estimated the following costs and revenues for the project: Cost of new equipment Sale of old equipment no longer needed Annual cash inflows Working capital needed Equipment maintenance in each of Years 3 and 4 $420,000 $ 80,000 $135,000 $ 65,000 $ 20,000 The new piece of equipment mentioned above has a useful life of five years and zero salvage value. The old piece of equipment mentioned above would be sold at the beginning of the project and there would be no gain or loss realized on its sale. Rosman uses the straight-line depreciation method for financial reporting and the CCA rate for tax purposes is 20%. 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.
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter19: Capital Investment
Section: Chapter Questions
Problem 10E: Roberts Company is considering an investment in equipment that is capable of producing more...
Related questions
Question
i need the answer quickly
![Rosman Company has an opportunity to pursue a capital budgeting project with a five-year time horizon. After careful study,
Rosman estimated the following costs and revenues for the project:
Cost of new equipment
Sale of old equipment no longer needed
Annual cash inflows
Working capital needed
Equipment maintenance in each of Years 3 and 4
$420,000
$ 80,000
$135,000
$ 65,000
$ 20,000
The new piece of equipment mentioned above has a useful life of five years and zero salvage value. The old piece of equipment
mentioned above would be sold at the beginning of the project and there would be no gain or loss realized on its sale. Rosman
uses the straight-line depreciation method for financial reporting and the CCA rate for tax purposes is 20%. 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.
Required:
1. Compute the net present value of this investment opportunity. (Round your PV factor to 4 decimal places and all the other
calculations to nearest whole dollar.)
Net present value
2. Would you recommend that the contract be accepted?
Yes
No](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F969e49e8-4d1f-4775-83de-f808eb484ef3%2F230176a5-0444-4fe9-894e-d98ed7ee5085%2Fur283bo_processed.png&w=3840&q=75)
Transcribed Image Text:Rosman Company has an opportunity to pursue a capital budgeting project with a five-year time horizon. After careful study,
Rosman estimated the following costs and revenues for the project:
Cost of new equipment
Sale of old equipment no longer needed
Annual cash inflows
Working capital needed
Equipment maintenance in each of Years 3 and 4
$420,000
$ 80,000
$135,000
$ 65,000
$ 20,000
The new piece of equipment mentioned above has a useful life of five years and zero salvage value. The old piece of equipment
mentioned above would be sold at the beginning of the project and there would be no gain or loss realized on its sale. Rosman
uses the straight-line depreciation method for financial reporting and the CCA rate for tax purposes is 20%. 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.
Required:
1. Compute the net present value of this investment opportunity. (Round your PV factor to 4 decimal places and all the other
calculations to nearest whole dollar.)
Net present value
2. Would you recommend that the contract be accepted?
Yes
No
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 4 images
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
![Cornerstones of Cost Management (Cornerstones Ser…](https://www.bartleby.com/isbn_cover_images/9781305970663/9781305970663_smallCoverImage.gif)
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
![Intermediate Financial Management (MindTap Course…](https://www.bartleby.com/isbn_cover_images/9781337395083/9781337395083_smallCoverImage.gif)
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
![Financial Management: Theory & Practice](https://www.bartleby.com/isbn_cover_images/9781337909730/9781337909730_smallCoverImage.gif)
![Cornerstones of Cost Management (Cornerstones Ser…](https://www.bartleby.com/isbn_cover_images/9781305970663/9781305970663_smallCoverImage.gif)
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
![Intermediate Financial Management (MindTap Course…](https://www.bartleby.com/isbn_cover_images/9781337395083/9781337395083_smallCoverImage.gif)
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
![Financial Management: Theory & Practice](https://www.bartleby.com/isbn_cover_images/9781337909730/9781337909730_smallCoverImage.gif)
![EBK CONTEMPORARY FINANCIAL MANAGEMENT](https://www.bartleby.com/isbn_cover_images/9781337514835/9781337514835_smallCoverImage.jpg)
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College