Capital budgeting Flynn Corporation is debating whether to purchase a new comput

Question

Capital budgeting

Flynn Corporation is debating whether to purchase a new computerized production system. The system will cost $450,000, and have an estimated 10-year life with a salvage value of $70,000. The estimated operating results from the new production system are as follows:

All revenue and expenses other than depreciation will be received and paid in cash. (Show all Calculations)

Compute the following for this proposal:

(a) Annual net cash flow: $__________

(b) Payback period: __________ years

(c) Return on average investment: __________%

(d) Net present value, discounted at an annual rate of 6% (present value of $1 due in 10 years, discounted at 6%, is 0.558; present value of $1 received annually for 10 years, discounted at 6%, is 7.360): $__________

Explanation / Answer

Assume straight line depreciation, which is $27,000 per year. Total expenses are $135,000. Total expenses less depreciation is $108,000. Revenue is $163,000. Net cash flow excludes depreciation. Depreciation is not part of cash flow calculations. Depreciation is really for tax purposes but doesn't affect cash flow. So, $163,000 - $108,000 is $55,000. (Revenue minus (total expenses minus depreciation) equals net cash). Report Abuse

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects