Question

(a nue a sund ousiamsu asn)inaudaaanae (Free cash flows) Boiger, Inc, a manufacturing company in Harvey, Illinois is considering 7. purchasing the adjacent property to temporarily expand its operation for a ten-year period. It plans to move its operation to Wyoming after such time. The major constraint that it faces is the removal of underground storage tanks that remain from a defunct chemical plant. Prior to deciding, it will conduct a soil test to determine if it is conducive for its operation. The test is expected to cost approximately $1,000. Removal of the tanks and refurbishing costs are expected to cost $1,500,000 It also plans to purchase hi-tech manufacturing equipment, building, and land for $2,000,000 It expects to incur depreciation expense of $100,000 per year. It expects to generate $400,000 in operating income during each of its ten years of operation. Boiger, Inc. customarily carries $350,000 of net operating working capital, mainly in the form of inventory and accounts payable. After ten years, it plans to move its equipment to its new facility in Wyoming and retain the property. Boiger, Inc has a marginal tax rate of 35%. What are its free cash flows for the purpose of capital budgeting? Are they conventional (traditional) cash flows?

please show all work in excel if possible.

Answer 1

Free cash flow is A way of looking at A business cash flow to see what is available for distribution among all the securities holders of A corporate entity.

Free cash flow can be calculated in various ways, depending on audience and available data are of it is that the earnings before interest and taxes multiplied by (1- tax rate) add, depreciation and amortization and then subtract changes in working capital and capital expenditure.

As frm the question it is clear that.....

The period is of 10yr

Cost of approximately is $1000

Other expenses costs to $1500000

Further asset purchased is $2000000

Deprecation is $100000 per yr and operating income is $400000 for each 10yr of operation

35%is the marginal tax rate

Net operating working capital is $350000

The method of capital budgeting helps to find a profitable project. The payback period is calculated by dividing the initial investment by the annual cash flows. But the main drawback is it ignores the time value of money.

Capital budgeting is the planning process used to determine whether an organization's long term investment are worth and here it worth