Consider the case of Marston Manufacturing Company: Marston Manufacturing Compan
ID: 2795852 • Letter: C
Question
Consider the case of Marston Manufacturing Company: Marston Manufacturing Company is considering a project that requires an investment in new equipment of $3,800,000, with an additional $190,000 in shipping and installation costs. Marston estimates that its accounts receivable and inventories need to increase by $760,000 to support the new project, some of which is financed by a $304,000 increase in spontaneous liabilities (accounts payable and accruals). and consists of the price of the new equipment plus The total cost of Marston's new equipment is the In contrast, Marston's initial net investment outlay is Suppose Marston's new equipment is expected to sell for $800,000 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? $936,000 O $480,000 $800,000 O $776,000Explanation / Answer
Answer to Part 1:
The Total Cost of Marston’s new Equipment is $3,990,000 ($3,800,000 + $190,000) and consists of the price of the new equipment plus the Shipping and Installation Cost.
In Contrast, Marston’s Initial Net Investment outlay is $4,446,000 ($3,800,000 + $190,000 + $456,000).
Initial Net Investment Outlay = Total Cost of Equipment + Increase in Working Capital
Increase in Working Capital = $760,000 - $304,000
Increase in Working Capital =$456,000
Answer to Part 2:
Total Termination Cash Flow = After Tax Salvage Value + Recovery of Net working Capital
After Tax Salvage Value = $800,000 * (1 – 0.40)
After Tax Salvage Value = $480,000
Total Termination Cash Flow = $480,000 + $456,000
Total Termination Cash Flow = $936,000