LEE Corporation intends to purchase equipment for $1,500,000. The equipment has

Question

LEE Corporation intends to purchase equipment for $1,500,000. The equipment has a 5-year useful life and will be depreciated on a straight-line basis. Addition of the equipment requires additional working capital of $20,000. The $20,000 is expected to be recaptured at the end of the project. LEE’s marginal tax rate is 40%. Use of the equipment is expected to change the company’s reported EBIT by $600,000 in year one, $700,000 in year two, $550,000 in year three, $200,000 in year four, and $100,000 in year five. Due to changing market conditions, the equipment did have a salvage value of $100,000 at the end of year five. 1. The initial outlay for this project is A) $1,500,000 B) $1,520,000 C) $1,540,000 D) $1,510,000 2. The free cash flow ins Year 1 is A) $630,000 B)$420,000 C) $660,000 D) $720,000 3) The free cash flow in year 2 is? A) $630,000 B)$420,000 C) $660,000 D) $720,000 LEE Corporation intends to purchase equipment for $1,500,000. The equipment has a 5-year useful life and will be depreciated on a straight-line basis. Addition of the equipment requires additional working capital of $20,000. The $20,000 is expected to be recaptured at the end of the project. LEE’s marginal tax rate is 40%. Use of the equipment is expected to change the company’s reported EBIT by $600,000 in year one, $700,000 in year two, $550,000 in year three, $200,000 in year four, and $100,000 in year five. Due to changing market conditions, the equipment did have a salvage value of $100,000 at the end of year five. 1. The initial outlay for this project is A) $1,500,000 B) $1,520,000 C) $1,540,000 D) $1,510,000 2. The free cash flow ins Year 1 is A) $630,000 B)$420,000 C) $660,000 D) $720,000 3) The free cash flow in year 2 is? A) $630,000 B)$420,000 C) $660,000 D) $720,000

Explanation / Answer

1.B) $1,520,000 Initial outlay Cost of the asset 1500000 Additional working capital 20000 Totala Initial Outlay $1,520,000 2. C) $660,000 Depreciation =( Cost of the asset - Solvage value) /life time = (1520000 - 20000)/5 = 1500000 / 5 = $300000 Free Cash flow in 1 year EBIT 600000 Less: Tax 40% (600000*40%) 240000 360000 Add: Depreciation 300000 Free Cash Flow $660,000 3. D) $720,000 Free Cash Flow in 2 year EBIT 700000 Less: Tax 40%(700000*40%) 280000 420000 Add: Depreciation 300000 Free Cash Flow $720,000 Thank you.... Initial outlay Cost of the asset 1500000 Additional working capital 20000 Totala Initial Outlay $1,520,000

Related Questions

Navigate

• Browse (All)
• Browse L
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.