Question
Automotive, Inc. is considering the purchase of new equipment. To begin the project, the equipment costs $510,000, and an additonal $40,000 is needed to install
Automotive, Inc. is considering the purchase of new equipment. To begin the project, the equipment costs $510,000, and an additonal $40,000 is needed to install it. An inventory investment cost of $75,000 is also required at the start of the project. The equipment will be depreciated straight-line to zero over a five-year life. The equipment will generate additional annual revenues of $280,000, and it will have an annual cash operating expenses of $100,000. The equipment will be sold for $80,000 after five years. Automotive, Inc is in the 28% tax bracket and its cost of capital is 12%.
What are the annual after tax free cash flows (operating cash flows for years 1-5?
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