Question
Calculating 'cash flows at the end' Today (Year 0), Pear Corporation is evaluating whether to invest in a new canning machine that costs $500,000 and
Calculating 'cash flows at the end'
Today (Year 0), Pear Corporation is evaluating whether to invest in a new canning machine that costs $500,000 and the company expects to use it for eight years, after which it will be sold. Tax rules state the machine should be depreciated on a straight-line basis over ten years. The company has already agreed to sell the machine in eight years time to an unrelated firm for $35,000. The new machine will result in an immediate $6,000 reduction in inventory from the companys current level of $42,000. However, it is anticipated that accounts payable associated with the new machine must immediately increase by $8,000. Pear Corporation will borrow $500,000 to fund the purchase of the new machine. This loan is an eight-year interest only loan with an interest rate of 7% per annum. The principal of the loan will need to be repaid at the end of the loan term. Assume the company tax rate is 30%. What are the 'cash flows at the end'? [Describe and list separately each cash flow and the corresponding amount on a new line, as in lecture and tutorial examples.] [You must show your working out, otherwise you will be penalised].
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