Consider the case of Alexander Industries Alexander Industries is considering a
ID: 2785487 • Letter: C
Question
Consider the case of Alexander Industries Alexander Industries is considering a project that requires an investment in new equipment of $3,400,00D, with an additional $170,000 in shipping and installation costs. Alexander estimates that its accounts receivable and inventories need to increase by $680,000 to support the new project, some of which is financed by a $272,000 increase in spontaneous liabilities (accounts payable and accruals). The total cost of Alexander's new equipment is the and consists of the price of the nw equipment plus In contrast, Alexander's initial net investment outlay is Suppose Alexander's new equipment is expected to sell for $4DD,000 at the end of its four-year useful life, and at the same time, the firm expects to recover all of its net working capital investment. The company chose to use straight-line depreciation, and the new equipment was fully depreciated by the end of its useful life. If the firm's tax rate is 40%, what is the project's total termination cash flow? O $400,000 O $568,000 O $240,000o O $648,0DDExplanation / Answer
Total cost=3400000+170000=3570000
Consists of price plus installation costs of 170000
Intial working cpaital investment=680000-272000=408000
Net investment outlay=3570000-408000=3162000
Option D
Last year book value=0..Hence, sale would attract tax of 400000*40%=160000
Sale=400000
Tax on sale=160000
So, Net sale=240000
Final year would recover working capital investment of 408000
So, total final year cash flows=240000+408000=648000