Bebop, Inc. is planning a project that requires purchasing some new, highly-effi

Question

Bebop, Inc. is planning a project that requires purchasing some new, highly-efficient CD-burning equipment for $150,000. The freight will be $12,000, and Bebop will spend an additional $4,000 to have the equipment installed. At the end of the equipment’s 10-year life, it will be scrapped at an after-tax cost of $2,000. Bebop expects that they will create new CDs at a much faster rate than they currently do, so their inventory of blank CDs will rise by $28,000. They also expect their Accounts Payable to rise by $22,000.

a) What is Bebop’s total initial investment for this project? When will it occur?

b) What is the annual depreciation expense?

c) What is the terminal cash flow for this project? When will it occur?

Explanation / Answer

a) The total initial investment on the project is the sum of the cost of the equipment ($150,000), freight charges ($12,000) and the equipment installation cost ($4,000). Therefore, the total initial investment of the project is $166,000.

b) The annual depreciation expense using straight line depreciation would be $15,000.

c)The terminal cash flow of this investment would be the scrap value of the machine, which is $2,000. This cash flow would occur at the end of the useful life of the machine, that is, after 10 years from the date of investment.

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