Question

Winthrop Company has an opportunity to manufacture and sell a new product for a five-year period. To pursue this opportunity, the company would need to purchase a piece of equipment for $ 130,000. The equipment would have a useful life of five years and zero salvage value. It would be depreciated for financial reporting and tax purposes using the straight-line method. After careful study, Winthrop estimated the following annual costs and revenues for the new product:
Annual revenues and costs:
Sales revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 250,000
Variable expenses . . . . . . . . . . . . . . . . . . . . . . . . . $ 120,000
Fixed out-of-pocket operating costs . . . . . . . . . . .$ 70,000
The company’s tax rate is 30% and its after-tax cost of capital is 15%.

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



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  • CreatedMay 20, 2014
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