Question
Milton Industries wants to purchase new equipment that has a quoted price of $1,000,000. Milton estimates an additional cost of $95,000 will be needed today
Milton Industries wants to purchase new equipment that has a quoted price of $1,000,000. Milton estimates an additional cost of $95,000 will be needed today to have the equipment modified, shipped, and installed. The purchase of this additional equipment will require Milton to invest an estimated $65,000 in net working capital upfront, and this investment should be recovered when Milton sells the equipment. If purchased, the equipment will be employed for a total of five years, and then sold for an estimated $680,000. The equipment will be depreciated straight-line on a five-year schedule. During each of the years that the equipment is in service, it is expected to boost Miltons sales revenue by $278,000 though annual operating costs (other than depreciation) are also expected to be higher, to the extent of $74,000. Milton faces a marginal tax rate of 25%, and its cost of capital is 7.00%. The total net cash flow from this project for the terminal year (year 5) is: $757,250 $709,250 $740,150 $782,750 $785,250
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