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Question - 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
$420,000
Working capital needed
$79,000
Overhaul of the equipment in two years
$27,500
Annual revenues and costs:
Sales revenues
$40,000
Variable expenses
$275,000
Fixed out-of-pocket operating costs
$118,000
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 10%. When the project concludes in five years the working capital will be released for investment elsewhere within the company.
Calculate the net present value of this investment opportunity.
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