a.)Your fledgling company currently manufactures cheap t-shirts that are sold to
ID: 2761791 • Letter: A
Question
a.)Your fledgling company currently manufactures cheap t-shirts that are sold to often inebriated students on Spring Break. Many of them seem to get sunburned since they don’t have the sense to put on sunscreen. Thus, as a public service, you have decided to expand your product line and offer equally cheap hats. To do so will require purchasing new equipment. You have the following information on this investment project, what are the after-tax cash flows that it is expected to generate? (my answers are in thousands)
Cost of hat making machinery: $70,000
Expected life of machinery: 5 years
Expected Salvage Value of hat making machinery after 5 years: $20,000
Depreciation method: straight line
Expected sales of hats: $130,000 per year
Cost of raw material: $70,000 per year
Cost of additional labor: $20,000 per year
Additional Net Working Capital required at the start of the project: $20,000
Tax rate: 35%.
-83 / 30.9 / 30.9 / 30.9 / 30.9 / 63.9
-90 / 30.9 / 30.9 / 30.9 / 30.9 / 63.9
-90 / 30.9 / 30.9 / 30.9 / 30.9 / 43.9
-90 / 16.9 / 16.9 / 16.9 / 16.9 / 43.9
-70 / 21.8 / 21.8 / 21.8 / 21.8 / 70.9
a.-83 / 30.9 / 30.9 / 30.9 / 30.9 / 63.9
b.-90 / 30.9 / 30.9 / 30.9 / 30.9 / 63.9
c.-90 / 30.9 / 30.9 / 30.9 / 30.9 / 43.9
d.-90 / 16.9 / 16.9 / 16.9 / 16.9 / 43.9
e.-70 / 21.8 / 21.8 / 21.8 / 21.8 / 70.9
Explanation / Answer
Ans -90/30.9/30.9/30.9/30.9/43.9 Details In Thousands In Thousands Cost of hat making Machine 70 Additional Nt working capital 20 Initial Cash outflow 90 Expected Sales 130 Less Cost of Raw material -70 Less Cost of Additional Labor -20 Net Cash inflow before tax 40 Less tax 14 Add Depreciation Tax Shield 4.9 Net Cash inflow after Tax per Annum 30.9 Salvage Value 20 Less Book value 0 20 Less Tax on capital Gain 7 After tax terminal cash flow 13
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