Question

Gaston Company is considering a capital budgeting project that would require a $3,300,000 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 12%. 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: $3,400,000 1,600,000 1,800,000 Sales Variable expenses Contribution margin Fixed expenses: Advertising,, salaries, and other fixed out-of-pocket costs Depreciation Total fixed expenses $680,000 660,000 1,340,000 ৪ 460, 000 Net operating income 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

Calculation of Net present value

Calculating Net Cash Inflows Particulars Amount Net Operating Income $ Less: Tax @ 30% 460,000 $ 138,000 Net Income 322,000 Add Depreciation Cash inflows 660,000 982,000 Net Prasent value = Initial cash flows PV of cash inflows PV of cash inflows Annual cash inflows PVIFA ( 12%, 5 years) PV of cash inflows $ 982000 * PVIFA ( 12 % , 5 years) PV of cash inflows $ 3539914 Net Prasent value $330000 -$ 3539914 = $ - 239914