Question
OlourunLtdis the major employer in the FrontHill area, where the firm is located. The companyis considering the acquisition of a new production line. The equipment
OlourunLtdis the major employer in the FrontHill area, where the firm is located. The companyis considering the acquisition of a new production line. The equipment would cost$720 000 and installation cost would amount to $59 000. At the end of its 5-year life, it is expected to be disposed of at its salvage value of $70 000.The new equipment would allow the company to expand production significantly, which would require an increase in working capital of $90 000. If the purchase is made, the firm's maintenance costs would be reduced by $60 000annually.However, at the end of the third year, a major overhaul would have to be undertaken at a cost of $80 000.Operating cash flowswouldbe$220000in the first year; this would increase by 2%foreachof the following years.
The company's cost of capital is 14%and the relevant corporate tax rate is 25%
a)Calculate the relevantafter-taxnet cash flowsand after-tax profitsover the life of the investment.
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