Question

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 . . . . . . . . . . . . . . . . . . . . . $ 250,000
Working capital needed . . . . . . . . . . . . . . . . . . . . . . . $ 60,000
Overhaul of the equipment in two years . . . . . . . . . . . $ 18,000
Annual revenues and costs:
Sales revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 350,000
Variable expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 180,000
Fixed out-of-pocket operating costs . . . . . . . . . . . . . $ 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.

Required:
Calculate the net present value of this investment opportunity.



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  • CreatedMay 20, 2014
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