Question
You are considering a cost reduction project for your business. The project will require an investment of $1,500,000 in new equipment. The equipment also has
You are considering a cost reduction project for your business. The project will require an investment of $1,500,000 in new equipment. The equipment also has shipping and handling charges of $15,000 and installation cost in your facility of $100,000. The change will require an increase in inventory of $50,000. The equipment falls into the 3-year MACRS class (rates of 33%, 45%, 15%, and 7% in years 1-4, respectively). You expect to operate the new equipment and then shut down operations at the end of year 5. The salvage value of the equipment at the end of year 5 is expected to be $250,000. The equipment change is not expected to lead to any sales increases but it will reduce annual operational costs by $450,000 in year 1, and in subsequent years cost savings will increase by 3% each year. Your business has a 40% tax rate and your WACC is 11%. Determine the time period five cash flow. please show work
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