(Ignore income taxes in this problem.) The Finney Company is reviewing the possi

Question

(Ignore income taxes in this problem.) The Finney Company is reviewing the possibility of remodeling one of its showrooms and buying some new equipment to improve sales operations. The remodeling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%. What would the annual net cash inflows from this project have to be in order to justify investing in remodeling? A) $14,495 B) $35,842 C) $16,147 D) $29,158

Explanation / Answer

D) 29,158 Cash outflow year 1 is 150,000 Cash inflow in year 10 is 40,000/1.16^10= 9067.34 So we would need the present value of the annual cash flows to be at least 150,000-9067.34= 140,932.66 Looking at an annuity table the factor at 16% for 10 years is 4.8332. So 140,932.66/4.8332= 29,158 (within $1 or so).

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