Problem
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
|
240,000
|
Working capital needed
|
61,000
|
Overhaul of the equipment in two years
|
18,500
|
Annual revenues and costs:
|
|
Sales revenues
|
360,000
|
Variable expenses
|
185,000
|
Fixed out-of-pocket operating costs
|
82,000
|
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 40% 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:
Calculate the net present value of this investment opportunity.