A project will produce sales of 2,400 units a year for 4 years. The project requ

Question

A project will produce sales of 2,400 units a year for 4 years. The project requires the immediate purchase of equipment at a cost of $100,000. The equipment will be depreciated to a book value of $20,000 (not to zero) on a straight line basis. The equipment will be salvaged at the end of the project creating a $40,000 before-tax cash flow. It costs $18 in labor and materials to produce each unit, and the machinery requires $1,500 each year in maintenance. There are no other costs associated with production. Each unit has an anticipated sales price of $70. If the project is taken, Accounts Payable will immediately increase by $11,000 and Inventory will increase by $50,000.

Part A: What is the after-tax salvage value of the equipment given a marginal tax rate of 25%?

Part B: What is the Operating Cash Flow (OCF) per year?

Part C: What is the firm's marginal revenue?

Part D: What is the initial investment in Net Working Capital?

Explanation / Answer

1)Book value =$20,000

salvage value =$ 40,000

Net capital gain =20,000

Tax on capital gainn = 20000*.25 = 5000

so net proceeds /salvage net of capital gain tax = 40000-5000 = $ 35,000

correct option is"B" - $35,000

2)

correct option is"B" -$ 97,475

3)correct option is "E" -$70

4)Initial investment in net working capital = current asset- current liabilities

                                                          = 50000- 11000

                                                            = $ 39,000

correct option is"D" - 39000

Revenue [ 70*2400] 168,000 less:Labor cost [ 18*2400] (43,200) Maintainenece (1500) Depreciation [(100000-20000)/4] (20000) cash flow before tax 103300 less tax (25%) (25825) cash flow after tax 77475 add:depreciation (non cash( 20000 operatingcash flow 97475

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