Folino Corporation is considering a capital budgeting project that would require

Question

Folino Corporation is considering a capital budgeting project that would require investing $120,000 in equipment with an expected life of 4 years and zero salvage value. Annual incremental sales would be $380,000 and annual incremental cash operating expenses would be $300,000. The project would also require an immediate investment in working capital of $10,000 which would be released for use elsewhere at the end of the project. The project would also require a one-time renovation cost of $30,000 in year 3. The company's income tax rate is 35% and its after-tax discount rate is 15%. The company uses straight-line depreciation. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting. The total cash flow net of income taxes in year 3 is: $32,500 $62,500 $43,000 $50,000

Explanation / Answer

Answer: cash flow net od tax in year 3 is $32500

year 0 1 2 3 4 cost of equipment -120000 working capital -10000 incremental sales 380000 380000 380000 380000 incremental cash cost -300000 -300000 -300000 -300000 Depreciation -30000 -30000 -30000 -30000 Net income before tax 50000 50000 50000 50000 Income tax expense -17500 -17500 -17500 -17500 Net income 32500 32500 32500 32500 Add depreciation 30000 30000 30000 30000 Cash flow 62500 62500 62500 62500 Renovation cost -30000 working capital recovery 10000 Net cash flow -130000 62500 62500 32500 72500

Related Questions

Navigate

• Browse (All)
• Browse F
• Subjects

---