Ignore Income taxes in thls problem.,) The Finney Company is reviewing the possi
ID: 2430931 • Letter: I
Question
Ignore Income taxes in thls problem.,) The Finney Company is reviewing the possibility of remodeling one of its and buying some new equipment to improve sales operations. The remodeling would cost $196,000 nd the useful life of the project is 12 years. Additional working capttal needed Immediately for this project would be $49,000; the working capital would be released for use elsewhere at the end of the 12-year perlod. The equipment a In the projec t rate i at would the annual net cash inflows from this project have to be in order to justify Investing in remodeling? (Round ur 'PV factors' to three decimal places. Round your other in ate calculations and final answer to the nearest dollar) (Use exhibiti1b-1. exhihitlb-2 0 O $49.716 O $49.158 O $55.185 O $26,601Explanation / Answer
The answer is the second option 49158
Lets see how it comes.
Purchase price of new equipment = 196000
Add: Working capital = 49000
Total = 245000
Less: Present value of salvage value = 19500 x .137 = 2671.5
Lees: Present value of working capital recptured in year 12 = 49000x.137 = 6713
So the total initial outflow = 235615.5.
To accept the proposal atleast the present value of inflow should be = Present value of out flow
PVAF, @18%, 12 years = 4.793
So 235615.5 = 4.793 x Anual cash inflow
Annual cash inflow = 235615.5/4.793 = 49158