Question
A firm is considering an investment in capital equipment. The equipment requires an initial cash outflow of $1,000,000, out of which $700,000 is financed with
A firm is considering an investment in capital equipment. The equipment requires an initial cash outflow of $1,000,000, out of which $700,000 is financed with debt at a 4% cost of debt (kd) amortized as a regular annuity over 3 years, and $300,000 is financed with equity at a cost of equity of 12% (ke). The tax rate (t) is 30%. Given the 3-year life of the equipment, the depreciation schedule is as follows: Year 1, $333,000; Year 2, $445,000; Year 3, $148,000; and Year 4, $74,000.
Some basic cash income and cash expense data for this equipment is shown below.
Operating Cash Incomet (OIt) is $800,000 per year, years 1 to 3.
Operating Cash Expenset (OE t) is $300,000 per year, years 1 to 3.
This investments Arditti-Levy method Net Cash Flow for Year 1 is:
a. | $430,300 | |
b. | $206,056 | |
c. | $97,300 | |
d. | $458,300 |
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