Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

In this problem's solution, why has the salvage cost, net working capital and shutdown costs listed under 6th year, when the project lasts for 5

image text in transcribed

image text in transcribed

In this problem's solution, why has the salvage cost, net working capital and shutdown costs listed under 6th year, when the project lasts for 5 years?

Nitram's Body Works Pty Ltd is considering a new project. - A feasibility study has been conducted to determine whether or not the project is technically feasible, at a cost of $25,000. - The project will last for 5 years and will require the purchase of equipment costing $200,000. - The equipment will be depreciated on a diminishing value basis to a book value of zero for tax purposes. - The equipment is expected to have a salvage value of $10,000. - The project will increase revenue from $250,000 per year to $370,000 per year. Operating expenses are always 60% of revenue. - The project will require an increase in net working capital of $25,000. - It will cost $20,000 to shut down the project, including removal of buildings and equipment. - The corporate tax rate is 30% and the firm's WACC is 8.90%. Calculate the firm's incremental free cash flows in Years 0 to 6 by completing the following table

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

Step: 3

blur-text-image

Ace Your Homework with AI

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

Get Started

Students also viewed these Finance questions