Find the terminal cash flows in year three

Assignment Help Finance Basics

Reference no: EM131934156

Question: You have been asked by the president of your company to evaluate a proposed acquisition of equipment that will cost $120,000, with another $30,000 for installation. This new equipment will replace your current equipment which is fully depreciated which currently has a $20,000 salvage value, but would have no salvage value if it were to be kept in use for another 5 years. The new equipment may be depreciated using a five-year straight-line depreciation method. The equipment will have a salvage value of $30,000 at the end of the fifth year. Initially, the following changes would occur to net working capital: inventory will increase by $10,000 and Accounts Payables by $5,000. This project will decrease the company's costs by $20,000 per year, while increasing revenues by $80,000 due to filling back-orders that had often become lost sales. The current operating costs are 60 percent of revenues (hint: remember to adjust the resulting operating income by the cost savings) and the firm's marginal tax rate is 40 percent.

Calculate: (5 points each)

a. The initial outlay

b. The incremental operating cash flows for each of the 5 years

c. The terminal cash flows in year 3

d. Using the project's required rate of return of 14%, should the project be accepted?

Reference no: EM131934156

Questions Cloud

Find the cash flows for the given project : What will the cash flows for this project be? (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

Research red flag legislation as it pertains to health care : Research Red Flag legislation as it pertains to health care on the Internet. Red Flag legislation was enacted by the Federal Trade Commission in 2010.

The acquisition cost must be financed with equity : How much of the acquisition cost must be financed with equity?

Identify at least three possible risks : Risk identification and mitigation methods: identify at least 3 possible risks and how to reduce the impact of them.

Find the terminal cash flows in year three : You have been asked by the president of your company to evaluate a proposed acquisition of equipment that will cost $120,000, with another $30,000.

What you have learned about the ehr : Summarize the news story and explain how it relates to what you have learned about the EHR in class so far (4-5 paragraphs).

When determining its initial investment outlay : Which of the following would be considered a relevant cash flow that should be included when determining its initial investment outlay?

What is the amount of each payment : Ashea is a 22 year old senior who used the Stafford loan program to borrow $4,000 four years ago when interest rates were 4.06% per year. $5,000 was borrowed.

Distinguishing between money market and capital market : Describe the major advantages and disadvantages of three mains forms of business organizations: the proprietorship, the partnership and the corporation.

User Account

All Pages