The Finney Company is reviewing the possibility of remodeling one of its showroo

Question

The Finney Company is reviewing the possibility of remodeling one of its showrooms and buying some new equipment to improve sales operations. The remodeling would cost $340,000 now and the useful life of the project is 12 years. Additional working capital needed immediately for this project would be $80,000; the working capital would be released for use elsewhere at the end of the 12-year period. The equipment and other materials used in the project would have a salvage value of $60,000 in 12 years. Finney's discount rate is 11%. (Ignore income taxes.)

The immediate cash outflow required for this project would be: (Round discount factor(s) to 3 decimal places and final answer to the nearest dollar amount.)

The Finney Company is reviewing the possibility of remodeling one of its showrooms and buying some new equipment to improve sales operations. The remodeling would cost $340,000 now and the useful life of the project is 12 years. Additional working capital needed immediately for this project would be $80,000; the working capital would be released for use elsewhere at the end of the 12-year period. The equipment and other materials used in the project would have a salvage value of $60,000 in 12 years. Finney's discount rate is 11%. (Ignore income taxes.)

Explanation / Answer

Immediate cash outflow required will be:- 1) Remoddeling Cost = $340,000 2) Working cap required = $80,000 Total Cash Outflow = $420,000. Since the cash outflow is immediately required, therefore no discounting to be done, to get the present value. As discounting rate is applied to the future cash flows to get its Present Value.

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