Answered step by step
Verified Expert Solution
Question
1 Approved Answer
What is the incremental free cash flow the investment is expected to generate in year 6 that should be considered for capital budgeting purposes? Assume
What is the incremental free cash flow the investment is expected to generate in year 6 that should be considered for capital budgeting purposes?
Assume a company is considering investing in opening a new store. The following assumptions are made: Furniture, fixtures, and leasehold improvements will cost $450,000. Company will spend $30,000 to purchase inventory for the grand opening. Company already spent $12,000 in consulting fees. Company expects to sell 5,000 units each year for the next six years at an average $75 sales price per unit and an average $45 variable cost per unit. Company will incur $70,000 in fixed operating costs each year. Furniture, fixtures, and leasehold improvements will depreciate on an accelerated basis for tax purposes using a 7-year MACRS asset life. Company expects to switch to a different location six years from now and sell the furniture and fixtures for $65,000 before tax and sell through the remaining inventory. Company's tax rate will be 32%. What is the incremental free cash flow the investment is expected to generate in year 6 that should be considered for capital budgeting purposes? (Do not round intermediate calculations. Round your final answer to the nearest whole dollar i.e. 123456. Do not include commas or a dollar sign with your answer.) (Hint: You will need OCF, net working capital, and capital spending cash flows.)Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started