Back to Assignment Attempts: Keep the Highest: 10 1. Incremental costs Initial a
ID: 2785850 • Letter: B
Question
Back to Assignment Attempts: Keep the Highest: 10 1. Incremental costs Initial and terminal cash flow Consider the case of Newcastle Coal Company: Newcastle Coal Company is considering a project that requires an investment in new equipment of $3,800,000, with an additional 190,000 in shipping and installation costs. Newcastle estimates that its accounts receivable and inventories need to increase by $760,000 to support the new project, some of which is financed by a $304,000 increase in spontaneous liabilities (accounts payable and accruals). and consists of the price of the new equipment plus The total cost of Newcastle's new equipment is the In contrast, Newcastle's initial net investment outlay is Suppose Newcastle's new equipment is expected to sell for $800,000 at the end of its four-year useful life, and at the same time, the firm expects to recover all of its net working capital investment. The company chose to use straight-line depreciation, and the new equipment was fully depreciated by the end of its useful life. If the firm's tax rate is 40%, what is the project's total termination cash flow? O $776,000 $480,000 O $936,000 O $800,000 Flash Player MAC 27,0,0,183Explanation / Answer
The total cost of Newcastle’s new equipment is $3,990,000 ($3,800,000+$190,000) and consist of the price of the new equipment plus the shipping and installation costs.
In, contrast, Newcastle’s initial net investment outlay is $4,446,000 ($3,990,000+$760,000-$304,000)
Terminational cash flows:
= $800,000*(1-40%)+$760,000-$304,000
= $936,000
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