Pierre Imports is evaluating the proposed acquisition of new equipment at a cost
ID: 2682054 • Letter: P
Question
Pierre Imports is evaluating the proposed acquisition of new equipment at a cost of $95,000. In addition the equipment would require modifications at a cost of $10,000 plus shipping costs of $2,000. The equipment falls into the MACRS 3-year class, and will be sold after 3 years for $35,000. The equipment would require an increased inventory of 3,000. The equipment is expected to save the company $35,000 per year in before-tax operating costs. The company's marginal tax rate is 30 percent and its cost of capital is 10 percent. a. What is the cash outflow at Time 0?Explanation / Answer
Cash OF at T0 = Cost of Eqpt + Install cost + Shiping cost + Inc In Wrkg Cap = 95000+10000+2000+3000 = $110,000 The cost of a fixed asset includes all amounts incurred to acquire the asset and any amounts that can be directly attributable to bringing the asset into working condition. Directly attributable costs may include: - Delivery costs - Costs associated with acquiring the asset such as stamp duty and import duties - Costs of preparing the site for installation of the asset - Professional fees, such as legal fees and architects' fees