Determine the relevant operating cash flows

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Reference no: EM133989595

Question

THANOS wishes to determine the relevant operating cash flows associated with the purchase of the infinity gauntlet acquired on September 7, 2020 on instalment basis. The total instalment price is P12.188 million and is payable in five equal annual instalments beginning September 7, 2020. The equipment will be depreciated using a straight-line method. The company recognizes full depreciation in the year of purchased. THANOS's financial analyst estimated that the relevant time horizon for analysis is 6 years in relation to the six infinity stones. THANOS expects the revenues attributable to the equipment to be P15.8 million in the first year and to increase at 5% per year through year 6. Similarly, he estimates all expenses other than depreciation attributable to the equipment to total P12.2 million in the first year and to increase by 4% per year through year 6. He plans to ignore any cash flows after year 6. The firm has a marginal tax rate of 30% and its required return on the equipment investment is based on the market return of 10% with a beta coefficient of 1.25. The risk free rate is 7%.

Advise Thanos of the acceptability of the purchase of infinity gauntlet.

Reference no: EM133989595

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