Frank’s is analyzing a 6-year project that requires $578,000 in equipment to sta

Question

Frank’s is analyzing a 6-year project that requires $578,000 in equipment to start the project. This cost will be depreciated on a straight-line basis to a zero book value over the life of the project. At the end of the project, this equipment is expected to have an after tax salvage value of $123,000. The projected annual sales are $729,000 and the combined annual fixed and variable costs are $598,000. The tax rate is 35 percent. The project will reduce the firm’s inventory by $34,000 over the life of the project. What is the project’s initial cash flow? 1. -$544,000 2. -$563,000 3. -$578,000 4. -$612,000

Explanation / Answer

The Projects initial (Year 0) Cash flow would be -$578000.( Cost of equipment to start the project)

Option 3 would be the answer.

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