After spending a year and ?$50 comma 000?, you finally have the design of your n

Question

After spending a year and ?$50 comma 000?, you finally have the design of your new product ready. In order to start? production, you will need ?$30 comma 000 in raw materials and you will also need to use some existing equipment that? you've fully? depreciated, but which has a market value of ?$100 comma 000. Your colleague notes that the new product could represent 10?% of the? company's overall sales and that 10?% of overhead is ?$60 comma 000. Your tax rate is 40?%. As you start your analysis of the? product, what should be your initial incremental free cash? flow?

Explanation / Answer

Initial Incremental Cash Flow is the extra/incremental amount spent in Year 0 i.e. at the beginning of the project

Initial Incremental Cash flow = Raw material required + Sale value of equipment net of tax

$30,000+$60,000

=$90,000

Note: Sale Value of Equipment = $100,000

Written Down value = NIL

Profit on Sale = $100,000

Tax Rate = 40%

Tax = $40,000

Sale Value net of tax not received due to new project = $60,000

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.