Mideque, Inc., is considering a project to produce pens. It is estimated that th
ID: 2713654 • Letter: M
Question
Mideque, Inc., is considering a project to produce pens. It is estimated that the initial cost of the equipment,
including transportation, installation, and so forth, will be $24,000. Mideque also estimates that the revenues
(sales) each year over the fiveyear life of the project will be 15,000. The other yearly expense (e,g., cost of
goods sold, wages and salaries, etc., will be $7,000. Mideque will finance $9,000 by loan with an interest rate
of 15 percent year. The loan will be repaid at the rate of $2000 per year plus interest on the remaining
balance each year. Mideque uses straightline depreciation, and the equipment will have no salvage value at
the end of its life. Assume a corporateprofits tax rate of 50 percent.
1) Obtain the initial investment
a) 24,000
b) 15,000
c) 9,000
d) 33,000
2) Assuming the working capital requirement will be 1,000 and that the IRS allows and investment tax credit of 8% for this kind of project. Also assume that at the end of the life of this project the equipment can be sold for 4,000. Obtain the annual cash flow of the last period.
A) 6,4000
B) 6,000
C) 11,000
D) 5,4000
Explanation / Answer
Answer:1) a)24000
Answer:2 c)$11000
=15000-7000+4000-1000=11000