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 $155,000. 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 | $ | 380,000 | |
Variable expenses | $ | 210,000 | |
Fixed out-of-pocket operating costs | $ | 88,000 | |
The company’s tax rate is 30% and its after-tax cost of capital is 18%.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. Calculate the annual income tax expense that will arise as a result of this investment.
2. Calculate the net present value of this investment opportunity. (Round your final answer to nearest whole dollar.)
Computation of Annual Tax Expense | |
Sales Revneue | $380,000.00 |
Variable Expense | $210,000.00 |
Fixed Operating Expense | $88,000.00 |
Depreciation (155000/5) | $31,000.00 |
Profit Before Tax | $51,000.00 |
Tax Expense @ 30% | $15,300.00 |
hence , Annual Tax Expense will be $15300 |
Computation of NPV of Project | |||
Year | Cash Flow | PV @18% | Discounted Cash Flow |
0 | -$155,000 | 1 | -$155,000 |
1-5 | $66,700 | 3.1272 | $208,584 |
NPV | $53,584 | ||
* Annual Cash Inflow : $51000-$15300+31000=$66700 |
Winthrop Company has an opportunity to manufacture and sell a new product for a five-year period....
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