Suppose BearKat Enterprises is considering a project where they will make Espres

Question

Suppose BearKat Enterprises is considering a project where they will make Espresso coffee makers. They can buy the equipment they need to make the coffee makers for $500,000 plus another $40,000 for training and installation. They will have to increase inventory by $50,000 however, accounts payable will increase $20,000. They will stop buying the inventory at the end of the project and pay the Accounts payable. They think they can sell 7,000 coffee makers a year at a price of $65 each. The estimate variable costs at 40% of revenue. They follow a four yeas MACRS schedule for depreciation with the following depreciation rates: Year 1: 33% Year 2: 45% Year 3: 15% Year 4: 7% They believe the equipment has a salvage value of $10,000. BearKat Enterprises has a tax rate of 34%. What are the terminal cash flows?

Explanation / Answer

Terminal cash flows = After tax proceeds of salvage/disposal value + recovery of working capital

= ($10,000*(1-34%)) + ($50,000 - $20,000)

=$6,600 + $30,000

= $36,600

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