Calculate the relevant cash flows (for each year) for the following capital budgeting proposal. Enter the total net cash flows for each year in the answer sheet. (10 points)

• $90,000 initial cost for machinery;

• depreciated straight-line over 4 years to a book value of $10,000;

• 35% marginal tax rate;

• $55,000 additional annual revenues;

• $25,000 additional annual cash expense;

• annual expense for debt financing is $7,500.

• $3,500 previously spent for engineering study;

• The project requires inventory increase by $32,000 and accounts payable increase by $14,000 at the beginning of the project;

• The investment in working capital occurs one time at the beginning of the project and it requires working capital return to the original level when the project ends in 4 years;

• 11% cost of capital;

• life of the project is 4 years; and

• The new equipment will be sold at the end of 4 years; expected market value of the new equipment at the end of 4 years is $15,000;

Year

0

1

2

3

4

Net Cash Flow

-$108,000

$26,500

$26,500

$26,500

$57,750

## Solution:

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