Question
A corporation is considering expanding its operations to meet growing demand. The installed cost of the necessary new equipment will be $500,000. The equipment will
A corporation is considering expanding its operations to meet growing demand. The installed cost of the necessary new equipment will be $500,000. The equipment will be depreciated using straight-line depreciation over its 8-year life to a value of $0, at which point it is expected to be sold for $50,000. The expansion project will cause cash to increase by $20,000, accounts receivable to increase by $40,000 and inventories to increase by $60,000. At the same time, accounts payable will rise by an estimated $50,000 and accrued liabilities are predicted to go up $10,000. Long-term debt (necessary to finance the equipment) will increase by $100,000. The corporations marginal income tax rate is 35%
a) What is the expected change in net working capital?
b) What is the total initial investment? When will it occur?
c) What is the annual depreciation expense?
d) What is the total terminal cash flow? When will it occur?
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