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Consider the case of Arm & Leg Financial Services Inc. (A&L): Arm & Leg Financial Services Inc. (A&L) currently earns annual revenues of $2,250,000 and
Consider the case of Arm \& Leg Financial Services Inc. (A\&L): Arm \& Leg Financial Services Inc. (A\&L) currently earns annual revenues of $2,250,000 and incurs total operating expenses (excluding depreciation and interest expense) of 35% of revenues. Its earnings are taxed at a rate of 40%. Today, its budgeting committee is evaluating the purchase of a new security system. The security system is expected to cost $30,000, plus $3,500 in freight and setup expenses, and will be depreciated using straight-line depreciation. It is expected that the security system will have a useful life of 10 years and a salvage value equal to 25% of its purchase price. It is further expected that the security system will reduce the firm's losses due to customer shoplifting and employee theft, and cause a 15.00% increase in the firm's annual sales and total operating expenses (excluding depreciation and interest expense). If the security system is purchased, the firm will require an additional $5,000 in net working capital (NWC). The company's existing security system is almost completely worn out. It is fully depreciated and can't even be sold for scrap. As a result, there are no expected tax consequences associated with the disposal of the old security system. Given this information, 2. Complete the following tale that can be used to compute the firm's incremental operating cash flows. Note: Round your answers to the nearest whole dollar. 3. Complete the following equation that assists in the calculation of the firm's terminal cash flow for the new security system and calculate its value. NCFT= Operating After-Tax Cash Flow + Salvage value + Recovery of Net working capital, which totals $1,023,505 NCFT= Operating After-Tax Cash Flow + Salvage value, which totals $1,018,505 NCFT= Operating After-Tax Cash Flow + Recovery of Net working capital + Difference in depreciation expense, which totals $885,013
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