Rosman company has an opportunity to pursue a capital budgeting project with a five-year time horizon. after careful study, rosman estimated the following costs and revenues for the project:
cost of new equipment needed $ 500,000
sale of old equipment no longer needed $ 96,000
working capital needed $ 81,000
equipment maintenance in each of years 3 and 4 $ 36,000
annual revenues and costs:
sales revenues $ 570,000
variable expenses $ 255,000
fixed out-of-pocket operating costs $ 132,000
the new piece of equipment mentioned above has a useful life of five years and zero salvage value. the old piece of equipment mentioned above would be sold at the beginning of the project and there would be no gain or loss realized on its sale. rosman uses the straight-line depreciation method for financial reporting and tax purposes. the company’s tax rate is 30% and its after-tax cost of capital is 13%. 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.