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Question #19 - #20 will use the following setup. Cyclone Industrial is considering a project with an initial cost of $2.5 million to purchase a
Question #19 - #20 will use the following setup. Cyclone Industrial is considering a project with an initial cost of $2.5 million to purchase a piece of equipment, which will be depreciated straight-line to a book value of $500,000 over its 5-year life. The new equipment will reduce the operating costs by $725,000 per year (This is a pre-tax figure.) There is an initial investment in the net working capital (NWC) of $450,000 which will be maintained at this level until the NWC is recovered in the end. The equipment can be sold at $600,000 in the end. The marginal tax rate is 35%. What are the operating cash flows (OCF) over the lifetime of the equipment? $646,250 per year from year 1 to year 5 $611,250 per year from year 1 to year 5 $471,250 per year from year 1 to year 5 O $611,250 per year from year 1 to year 4 and 1,211,250 in year 5 By including all the components, what are the incremental free cash flows (FCFS) over the lifetime of the equipment? Hint: make sure you include the after-tax salvage value in year 5. Year o 1...4 5 ? ? ? -$2,950,000 ..... $646,250 per year . $1,696,250 -$2,950,000 ..... $611,250 per year ..... $1,626,250 -$2,950,000 ..... $611,250 per year . $1,661,250 -$2,500,000 ..... $471,250 per year . $1,071,250 -$2,950,000 ..... $646,250 per year ... .$1,661,250
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