Question

5. 42 points. A new piece of equipment, costing $80,000, will be depreciated via straight-line method over four years. The equipment will require shipping and installation of $20,000 and an increase in inventory of $10,000. In addition, account payables will increase by $7,000 while account receivables will increase by $11,000. This profitable firm's tax rate is 40%. The annual cost savings are expected to be $47,000/year for each of the four years it will be used. The expected resale (salvage) value, in year 4, is zero, and the firm's discount rate is 12%. a. Find initial outlay b. Find free cash flows for years 1 through 4 c. Find terminal cash flow

Answer 1

rate positively ..

ans a)
	initial outlay
	cost of equipement=		80000
	Shipping cost		20000
	Depreciable cost of equipment		100000
	Working capital
	increase in inventory		10000
	Increase in account payable		-7000
	increase in account receivable		11000
	Net working capital		14000
	total initial outlay		114000
ans b)	Computation of annual cash flow for year 1 to 4
i	Annual cost saving =		47000
ii	Depreciation=100000/4		25000
iii=i-ii	Profit before tax		22000
iv=iii*(1-40%)	Profit after tax =		13200
v=iv+ii	Cash flow		38200
	Ans =		38200
ans c)	Terminal cash flow= release of working capital			14000