Vitron Inc. is considering an investment in new capital equipment that will cost 250,000 plus an additional

Question:

Vitron Inc. is considering an investment in new capital equipment that will cost 250,000 plus an additional 15,000 investment in inventory to operate the equipment. They expect sales to increase by 177,000 a year for the next 6 years. Vitron executives are expecting expenses and cost to generate those sales will be 93,000 per year for the next 6 years. The company is in a 30% tax rate and is depreciating the equipment to a salvage value of 25,000 using straight line depreciation over its six year life. The company expects to recover the investment in inventory in year 6, and expects the equipment will be sold for 50,000. The cost of capital for Vitron is 12%.

1. How much will Vitron have to spend today to make this investment?

2. What is the operating cash flow in year 2?

3. What is the non-operating cash flow in year 6?

4. What is the NPV of the investment?

5. What is the IRR of Vitron's investment in capital equipment?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...