Hawkeye Company is considering a project that would require

Hawkeye Company is considering a project that would require an initial investment in equipment that costs $2,500,000. The equipment has a useful life of five years and no salvage value. The company has a tax rate of 40% and uses a discount rate of 15%. The project would provide net operating income each year as follows: 2,900,000 $900,000 2,000,000 Sales Variable Expenses Contribution Margin Fixed Out-of-Pocket Expss $300,000 Depreciation Net Operating Income $500,000 $1,200,000 Present Value of $1 Periods 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.925 0.907 0.890 0.873 0.857 0.842 0.826 0.812 0.797 0.783 0.769 0.756 0.889 0.864 0.840 0.816 0.794 0.772 0.751 0.731 0.712 0.693 0.675 0.658 0.855 0.823 0.792 0.763 0.735 0.708 0.683 0.659 0.636 0.613 0.592 0.572 0.822 0.784 0.747 0.713 0.681 0.650 0.621 0.593 0.567 0.543 0.519 0.497 3 4 resent Value of an Annuity of Periods 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 0.962 0.952 0.9430.935 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 1.886 1.859 1.833 1.808 1.783 1.759 1.736 1.713 1.690 1.668 1.647 1.626 2.775 2.723 2.673 2.624 2.577 2.531 2.487 2.444 2.402 2.361 2.322 2.283 3.630 3.546 3.465 3.387 3.312 3.240 3.170 3.102 3.037 2.974 2.914 2.855 4.452 4.329 4.212 4.100 3.993 3.890 3.791 3.696 3.605 3.517 3.433 3.352 5 1. What is the annual tax expense (cash outflow) for the project? 2. What is the net present value of the project?

Solution

1) Annual tax expense for the project = 1200000*40% = $480000

2) Net present value = Present value of cash inflow-Present value of cash outflow

= (1220000*3.352)-2500000

Net present value = $1589440