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:
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Cost of equipment needed
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$420,000
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Working capital needed
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$79,000
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Overhaul of the equipment in two years
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$27,500
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Annual revenues and costs:
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Sales revenues
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$40,000
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Variable expenses
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$275,000
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Fixed out-of-pocket operating costs
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$118,000
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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.