Chapter 14.C, Problem 3P

PROBLEM 13C-3 Income Taxes and Net Present Value Analysis LO13-8
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
Repair 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:

1. Calculate the annual income tax expense for each of years 1 through 5 that will arise as a result of this investment opportunity.
2. Calculate the net present value of this investment opportunity.