your firm is considering a new product development. an outlay of $90,000 is requ
ID: 2646496 • Letter: Y
Question
your firm is considering a new product development. an outlay of $90,000 is required for equipment, and an additional net working capital of $5000 is required. the project is expected to have a 4 year life, and th equipement will be depreciated on a straight line basis to a $10,000 book value. producing the new product will reduce current manufacturing expenses by $15,000 annually and increase earnings (revenue) before depreciation and taxes by $18,000 annually. stanton's marginal tax rate is 40 percent. stanton expects the equipment will have a marekt salvage value of $10,000 at the end of 4 years
Compute the total cash flows each period associated with the analysis of this project and clearly indicate them on a time line
Explanation / Answer
Cost of Machine 90,000.00 Life in yrs 4.00 Salvage Value 10,000.00 Depreciation = (Cost - Salvage Value)/ life Depreciation = (90,000 - 10,000)/ 4 Depreciation =20,000 Tax savings on depreciation = 20,000 * .4 = 8,000 Reduction in expenses 15,000.00 Increase in Earnings 18,000.00 Net benefit(Reduction in expenses + Increase in Earnings) 33,000.00 Tax Rate @40% 13,200.00 Net benefit after tax 19,800.00 Tax savings on depreciation 8,000.00 Operating cash Flows after Tax (Net benefit after tax + Tax Savings on Depreciation) 27,800.00 Particulars Year1 Year2 Year3 Year4 Operating cash Flows after Tax (Net benefit after tax + Tax Savings on Depreciation) 27,800.00 27,800.00 27,800.00 27,800.00 Initial Investment (90,000.00) 10,000.00 Working capital Investment (5,000.00) 5,000.00 Net Cash Flow (67,200.00) 27,800.00 27,800.00 42,800.00
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