Question
(a) The Minimax project requires the initial purchase of equipment costing $72,000, which will be depreciated fully using the straight-line method over 3 years for
(a) The Minimax project requires the initial purchase of equipment costing $72,000, which will be depreciated fully using the straight-line method over 3 years for tax purposes. Initially there will be an addition to working capital of $5,000 which will be recovered in the final year of the project. The project is expected to be operational for four years. At the end of the fourth year the project is expected to be sold for $12,000. The project will produce 25,000 units annually which will be sold at $6.00 per unit. Operational expenses include a fixed cost of $7,000 annually and a cost of production of $2.80 per unit. The relevant tax rate is 30%. Required: Calculate the free cash flows for the initial phase (Year 0), the ongoing phase (Years 1 3) and the terminal phase (Year 4). (5 marks) (b) State the four possible uses by a firm of free cash flows. (2 marks)
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