Question
A company is considering adding a second production line to meet the market demand. In order to add the second production line, the company needs
A company is considering adding a second production line to meet the market demand.
In order to add the second production line, the company needs to purchase $1.2 million worth of new machinery and spend another $100,000 improvement on its current building.
This new production line would produce 200,000 units, with expected sale price of $4.65 and a variable cost of $2.90 respectively for each unit. The required net working capital is $36,000. The fixed cost is $42,000 each year. By adding the second production line, the gross profit from the current production would be reduced by $29,000 each year. The salvage value for the machinery and building improvement would be $390,000 and 80,000 respectively. The company uses straight-line depreciation over the life of this project (5 years), its required rate of return is 15% and the tax rate is 34%. The total cash flow in year 5 would be closest to:
MC OPTIONS:
A. $748,885
B. $553,085
C. $582,070
D. $589,085
E. $618,740
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