Question
A company making plastic car parts buys new molding machines to expand its production capacity. The machines cost $2 million, with additional charges for delivery
A company making plastic car parts buys new molding machines to expand its production capacity. The machines cost $2 million, with additional charges for delivery and installation totaling $48,899. Employees will have to be trained to use the new machines at the cost of $8. With the increased production, accounts payable will increase by $53,473, inventory will increase by $78,672, and accounts receivable will increase by $70,718 at the outset. These changes in the working capital will be recaptured at the end of the projects life of 5 years. The depreciable life of the machines is 10 years, and the company uses straight-line depreciation. The increased production will increase the sales revenue by $3 million and the costs (including depreciation) by $1,106,913 per year in each of the next 5 years. The company expects to sell the machines after five years for $253,781. The companys tax rate is 20.10%, and its cost of capital (the projects required rate of return) is 10.65%. Find the terminal cash flow at the end of the projects life (Year 5).
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