Question

Gaston Company is considering a capital budgeting project that would require a $2,600,000 investment in equipment with a useful life of five years and no salvage value. The company's tax rate is 30% and its after-tax cost of capital is 13%. It uses the straight-line depreciation method for financial reporting and tax purposes. The project would provide net operating income each year for five years as follows: $3,300,000 1,690,000 1,610,000 Sales Variable expenses Contribution margin Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs Depreciation Total fixed expenses Net operating income $710,000 520,000 1,230,000 $ 380,000 Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using tables. Required: Compute the project's net present value. Net present value

Answer 1

Net operating income	380000
Add: Depreciation	520000
Less: Income tax expense	-114000	=380000*30%
Annual net cash flows	786000
Annual net cash flows	786000
X PV factor	3.517	=(1-(1.13)^-5)/0.13
Present value of Annual net cash flows	2764362
Less: Investment cost	2600000
Net Present value	164362