(Ignore income taxes & depreciation in this problem.) The Finney Company is revi

Question

(Ignore income taxes & depreciation 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) $31,037
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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