Question
YOU ARE ANALYZING THE PURCHASE OF NEW EQUIPMENT. SINCE YOU ARE NOT AN EXPERT ON THIS TYPE ON THIS TYPE OF EQUIPMENT, YOU HIRE A
YOU ARE ANALYZING THE PURCHASE OF NEW EQUIPMENT. SINCE YOU ARE NOT AN EXPERT ON THIS TYPE ON THIS TYPE OF EQUIPMENT, YOU HIRE A CONSULTING FIRM TO MAKE RECOMMENDATIONS. THE CONSULTANT CHARGED YOU $1,500 AND RECMMENDED THE PURCHASE OF THE LATEST MODEL FROM ACME CORP. OF AMERICA. THE EQUIPMENT COST $80,000, AND IT WILL COST ANOTHER $10,000 TO MODIFY IT FOR SPECIAL USE BY YOUR FIRM. THE EQUIPMENT WILL BE DEPRECIATED ON A STRAIGHT-LINE BASIS OVER SIX YEARS WITH NO SALVAGE VALUE. YOU EXPECT THE EQUIPMENT WILL BE SOLD AFTER THREE YEARS FOR $28,000. USE OF THE EQUIPMENT WILL REQUIRE AN INCREASE IN YOUR COMPANY'S NET WORKING CAPTITAL OF $4,000, BUT THIS $4,000 WILL BE RECOVERED AT THE END OF THE THREE. THE USE OF THE EQUIPMENT WILL HAVE NO EFFECT ON REVENUES, BUT IT IS EXPECTED TO SAVE THE FIRM $50,000 PER YEAR IN BEFORE-TAX OPERATING COST. YOUR COMPANY'S MARGINAL TAX RATE IS 35%. WHAT IS THE TERMINAL CASH FLOW FOR THIS PROJECT? A. $17,000 B. $24,500 C. $33,950 D. $37,950
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