Question
Gaston Company is considering a capital budgeting project that would require a $2,500,000 investment in equipment with a useful life of five years and no
Gaston Company is considering a capital budgeting project that would require a $2,500,000 investment in equipment with a useful life of five years and no salvage value. The companys 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:
Sales | $ | 3,200,000 | ||||
Variable expenses | 1,660,000 | |||||
Contribution margin | 1,540,000 | |||||
Fixed expenses: | ||||||
Advertising, salaries, and other fixed out-of-pocket costs | $ | 700,000 | ||||
Depreciation | 500,000 | |||||
Total fixed expenses | 1,200,000 | |||||
Net operating income | $ | 340,000 | ||||
Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables.
Required:
Compute the projects net present value.
can you please show all calculations
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