Reference no: EM132556477

Question - Cartman Ventures has spent $50,000 investigating the feasibility of establishing a new underwear factory. It would cost $2,000,000 to acquire the land for the factory and $8,000,000 to construct the factory building. Additional start-up costs include $1,500,000 for new machinery and $100,000 to relocate some equipment from Cartman's other factories. The equipment relocation cost would be tax-deductible at the time of payment. In addition, Cartman would have to increase its inventory levels by $100,000

The new factory is expected to increase Cartman's annual underwear sales by $2,500,000. However, the annual cost of goods sold is expected to increase by $180,000 and Cartman's wage bill would increase by $700,000.

Cartman regards the new factory as a 10-year project. At the end of that period, the factory building is expected to have a scrap value of $1,000,000 and the land is expected to be worth $3,000,000. The tax office has ruled that the building can be depreciated straight-line over 10 years, while the land is a non-depreciating asset. The tax office has also indicated that any profit made from selling the land will not be taxable. Cartman is taxed at 30% on its taxable income.

What is the total cash flow from closing down the project (i.e. excluding the annual operating cash flow)?

$4,100,000

$4,000,000

$3,800,000

$3,700,000

None of the other answers is correct