2. Incremental costs Initial and terminal cash flow Aa Aa Consider the case of A

Question

2. Incremental costs Initial and terminal cash flow Aa Aa Consider the case of Acme Manufacturing: Acme Manufacturing 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. Acme 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) The total cost of Acme's new equipment is and consists of the price of the new equipment plus the In contrast, Acme's initial net investment outlay is $4,142,000 $4,256,000 $4,446,000

Explanation / Answer

Cost of new equipment $3,800,000 Shipping and installation $190,000 Total Equipment cost $3,990,000 Increase in current assets $760,000 Increase in Current liabilities $304,000 Net increase in WC $456,000 Total Cost $4,446,000 Terminal value Tax @40% Net value Sale value $800,000 $320,000 $480,000 Return of Net WC $456,000 $0 $456,000 Total: $1,256,000 $320,000 $936,000 Terminal value after tax= $936,000

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