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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.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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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
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
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