Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

DDK Industries is considering a new capital budgeting project that will last for three years. Initial investment outlay for project equipment is expected to be

DDK Industries is considering a new capital budgeting project that will last for three years. Initial investment outlay for project equipment is expected to be $110,000. The equipment will be straight-line depreciated down to zero book value over the three year period. The expected market value of project assets is forecasted to be $50,000 when the project is liquidated at the end of the third year. Project will require $7,000 Net Working Capital investments in years 1 and 2. The project does not require any investment in fixed assets during years 1 and 3, but a $10,000 investment is projected in year 2. DDKs cost of capital is 12% and the project does not have a distinct risk profile. DDKs tax rate is 35%. Based on extensive research, analysts have prepared the following incremental revenues and before tax costs:

Year

0

1

2

3

Sales (Revenues)

100,000

100,000

100,000

- Cost of Goods Sold (50% of Sales)

50,000

50,000

50,000

Depreciation

36,667

36.667

36,667

EBIT

13,333

13,333

13,333

Capital Expenditures

-110,000

0

-10,000

0

Note: Additional fixed capital investments are depreciated straight line over a three-year period; first depreciation expense is deducted at the end of the year following the investment. The 50,000 liquidation value reflects enhancements realized through capital investments in fixed assets.

The after tax project cash flow including the terminal cash flow for the project in year 3 is closest to ___________?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

TExES Business And Finance Secrets Study Guide

Authors: TExES Exam Secrets Test Prep Team

1st Edition

1516706862, 978-1516706860

More Books

Students also viewed these Finance questions

Question

How does the production possibilities frontier illustrate scarcity?

Answered: 1 week ago

Question

1. Discuss the four components of language.

Answered: 1 week ago

Question

a. How many different groups were represented?

Answered: 1 week ago