Use the Following information to answer the 4 questions Grant Furniture Co. is c
ID: 2721031 • Letter: U
Question
Use the Following information to answer the 4 questions Grant Furniture Co. is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by William Sherman, a recently graduated finance major. The production line would be set in unused space in Crockett's main plant. The machinery's invoice price would be approximately $190,000; another $10,000 in shipping charges would be required; and it would cost an additional $20,000 to install the equipment. Further, Grant's net working capital would have to be increased by $30,000 to handle the new line. the machinery has an economic life of 4 years, and Grant has obtained a special tax ruling, which places the equipment in the MACRS 3-year class (33%, Yr 1; 45%, Yr2; 15%, Yr 3; and 7%, Yr 4). The machinery is expected to have a salvage value of $20,000 after 4 years of use. The new line would generate $125,000 in incremental earnings, before interest, taxes and depreciation (EBITD) in each of the next 4 years. The firm's tax rate is 40%, and its overall weighted average cost of capital is 12%.
1) Crockett's net investment outlay for this project is:
a) $190,000
b) $200,000
c) $220,000
d) $230,000
e) $250,000
2). The capitalized cost for this project is:
a) $190,000
b) $200,000
c) $220,000
d) $230,000
e) $250,000
3). The net non-operating cash flow at the time the project is terminated is:
a) $12,000
b) $20,000
c) $30,000
d) $42,000
e) $50,000
4.) Annual Operating cash flow for year one is:
a) $31,440
b) $52,400
c) $81,160
d) $104,040
e) $114,600
Explanation / Answer
1.
Crockett's net investment outlay for this project is=$190,000+$10,000+$20,000+$30,000=$250,000
2.
The capitalized cost for this project is=$190,000+$10,000+$20,000=$220,000
3.
The net non-operating cash flow at the time the project is terminated is=Working capital+Salvage value after tax
=$30,000+$20,000(1-0.2)=$30,000+$12,000=$42,000
4.
Annual Operating cash flow for year one is:
Particulars Amount EBITD $125,000 Less: Depreciation $72,600 EBIT $52,400 Less:Tax $20,960 EAT $31,440 Add: Depreciation $72,600 Annual Operating cash flow for year one $104,040Related Questions
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