Question
Use this information for problems 7-9. A company is determining whether to purchase new equipment. The equipment base price is $360,000 and would cost another
Use this information for problems 7-9.
A company is determining whether to purchase new equipment. The equipment base price is $360,000 and would cost
another $45,000 to install. The new equipment will generate an incremental cash operating profit (cash sales less cash
expenses) of $185,000 each year, but will need to be depreciated using the MACRS 3-year class (33%, 45%, 15%, and
7%). Additionally, in order to cover added ongoing maintenance expenses an investment in working capital of $10,000
which will be recovered at the end of the third year is necessary. The equipment will provide no further use at the end
of three years and is expected to be sold for $150,000. The marginal tax rate is 40% and the required rate of return is
12%.
7. The initial cash flow is _____.
a.-$360,000
b. -$405,000
c. -$370,000
d. -$415,000
8.The terminal cash flow is _____.
a.$303,592
b.$111,340
c.$160,000
d.$150,000
9. The NPV of this project is _____.
a. $7,473
b. $8,734
c. $18,736
d. $53,997
10. Net income for the coming year is expected to be $200,000 and the firm's payout ratio is 10%. The firm's target capital
structure uses 70% common equity and 30% debt. What is the maximum size of the capital budget if the firm does not want
to issue more common shares?
a. $140,000
b. $60,000
c. $257,143
d. $126,000
DBDC
please give the process
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