Incremental Costs

Marston Manufacturing Company is considering a project that requires an investment in new equipment of $3,600,000, with an additional $180,000 in shipping and installation costs. Marston estimates that its accounts reveivable and inventories need to increase by $720,000 to support the new project, some of which is financed by $288,000 increase in spontaneous liabilites (accounts payable and accruals).

1. The total cost of Martson's new equipment is ___________ (a. $3,780,000, b. $4,212,000, c. $720,000) and consists of the price of the new equipment plus the _______________________ (a. asset's salvage value, b. assets installation, shipping, and delivery costs.

2. In contrast, Marston's initial investment outlay is ________ (a. $4,212, 000, b. $4,032,000, c. $3,924,000)

3. Suppose Marston's new equipment is expected to sell for $600,000 at the end of its four-year useful life, and at the same time, the firm expects to recover all of its net working capital investment. The company chose to use straight-line depreciation, and the new equipment was fully depreciated by the end of its useful life. If the firm's tax rate is 40%, what is the project's total termination cash flow?

a. $672,000 b. $600,000 c. $360,000 d. $792,000