Healthy Potions, Inc., 1. is considering investing in a new production line for
ID: 2715087 • Letter: H
Question
Healthy Potions, Inc.,
1. is considering investing in a new production line for eye drops. Other than investing in the equipment, the company needs to increase its cash and cash equivalents by $10,000, increase the level of inventory by $58,719, increase accounts receivable by $25,000, and increase accounts payable by $5,000 at the beginning of the project. Healthy Potions will recover these changes in working capital at the end of the project 12 years later. Assume the appropriate discount rate is 11.6 percent. What are the present values of the relevant investment cash flows? (Round answer to 2 decimal places, e.g. 15.25.)
Present value=
2. just purchased computing equipment for $28,000. The equipment will be depreciated using a five-year MACRS depreciation schedule. If the equipment is sold at the end of its fourth year for $10,800, what are the after-tax proceeds from the sale, assuming the marginal tax rate is 35 percent. (Round answer to 2 decimal places, e.g. 15.25.)
After-tax proceeds=
Explanation / Answer
1. Changes in working capital = increase in cash+increase in inventory+increase in accounts receivable- increase in accounts payable
= 10,000+58,719+25,000 - 5,000 = 88,719. This is an increase in working capital and will have negative effect on the cash flow from operations.
Thus present value of this outflow = - 88,719 (as it is being done at the beginning of the year).
This amount will be recovered at the end of 12 years i.e there will be an inflow of 88,719 at the end of 12th year. Its present value = 88,719/(1.116^12) = 88,719/3.7322 = 23,770.94
Net present value = present value of inflows+present value of outflows = 23,770.94 - 88,719 = - $64,948.06
2. Purchase price = $28,000
The 5 year class will have a 200% declining balance depreciation.
Depreciation amount = purchase price*depreciation rate as per the MACRS table.
1st year depreciation = 28,000*20%. 2nd year depreciation = 32%*28,000. 3rd year = 19.2%*28,000 and 4th year = 11.52%*28,000.
Book value at the end of 4th year = Purchase price - total depreciation
= 28,000 - 23,161.60 = 4,838.40
Selling price = $10,800. Gain = selling price - book value at the end of 4th year
= 10,800 - 4,838.40 = $5,961.60
After tax proceeds = gain*(1-tax rate)
= $5,961.60 *(1-35%) = $3,875.04
Year Depreciation % Purchase price Depreciation amount 1 20 28,000 5,600.00 2 32 8,960.00 3 19.2 5,376.00 4 11.52 3,225.60 Total depreciation 23,161.60Related Questions
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