Bailey Sheppard Corp. ("BSC") manufactures musical equipment and is evaluating the economics of expanding its manufacturing facility to enable it to take on a new business customer contract for the next 4 years. Last year, the company paid Target Research LLC $35,000 to do a marketing research study for its product lines. The current expansion scenario would have total construction costs of $1.3 million and it would take about 50 days to complete (i.e., essentially up-front). The Company would also put in $250 thousand of new machinery. Inventory (raw materials, work-in-process, finished goods) investment needed for the expansion would be $65 thousand. Annual depreciation associated with the expansion would be $150 thousand per year for the next four years, but the company has decided for income tax purposes to expense 100% of the cost of the long-term assets in Year 0. The company expects to borrow 100% of the upfront costs and thereby incur $646 thousand in total interest expense over the life of the project. Incremental sales for this project are estimated to be $1.2 million for Year 1; $1.9 million for Year 2: $2.1 million for Year 3; and $1.2 million for Year 4. Cost of goods sold is estimated to be approximately 50% of total sales, and additional fixed costs are estimated to be $100 thousand per year. At the end of the project's estimated life in Year 4, the company estimates it will be able to sell excess capital assets for $125,000 and the expected book value for these items would be $0 (zero). Also at the end of the project. $40,000 of remaining inventory could be liquidated at cost. The weighted average cost of capital is 16%, its assumed marginal income tax rate is 25%, and its capital gains tax rate is 25%. What is the Total Annual Cash Flow for Year 2? $648,500 $377,500 $637,500 $605,000
Bailey Sheppard Corp. ("BSC") manufactures musical equipment and is evaluating the economics of expanding its manufacturing facility to enable it to take on a new business customer contract for the next 4 years. Last year, the company paid Target Research LLC $35,000 to do a marketing research study for its product lines. The current expansion scenario would have total construction costs of $1.3 million and it would take about 50 days to complete (i.e., essentially up-front). The Company would also put in $250 thousand of new machinery. Inventory (raw materials, work-in-process, finished goods) investment needed for the expansion would be $65 thousand. Annual depreciation associated with the expansion would be $150 thousand per year for the next four years, but the company has decided for income tax purposes to expense 100% of the cost of the long-term assets in Year 0. The company expects to borrow 100% of the upfront costs and thereby incur $646 thousand in total interest expense over the life of the project. Incremental sales for this project are estimated to be $1.2 million for Year 1; $1.9 million for Year 2: $2.1 million for Year 3; and $1.2 million for Year 4. Cost of goods sold is estimated to be approximately 50% of total sales, and additional fixed costs are estimated to be $100 thousand per year. At the end of the project's estimated life in Year 4, the company estimates it will be able to sell excess capital assets for $125,000 and the expected book value for these items would be $0 (zero). Also at the end of the project. $40,000 of remaining inventory could be liquidated at cost. The weighted average cost of capital is 16%, its assumed marginal income tax rate is 25%, and its capital gains tax rate is 25%. What is the Total Annual Cash Flow for Year 2? $648,500 $377,500 $637,500 $605,000
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Bailey Sheppard Corp. ("BSC") manufactures musical equipment and is evaluating the economics of expanding its manufacturing facility to
enable it to take on a new business customer contract for the next 4 years. Last year, the company paid Target Research LLC $35,000 to do a
marketing research study for its product lines. The current expansion scenario would have total construction costs of $1.3 million and it
would take about 50 days to complete (i.e., essentially up-front). The Company would also put in $250 thousand of new machinery.
Inventory (raw materials, work-in-process, finished goods) investment needed for the expansion would be $65 thousand. Annual
depreciation associated with the expansion would be $150 thousand per year for the next four years, but the company has decided for
income tax purposes to expense 100% of the cost of the long-term assets in Year 0. The company expects to borrow 100% of the upfront
costs and thereby incur $646 thousand in total interest expense over the life of the project. Incremental sales for this project are estimated
to be $1.2 million for Year 1: $1.9 million for Year 2: $2.1 million for Year 3; and $1.2 million for Year 4. Cost of goods sold is estimated to be
approximately 50% of total sales, and additional fixed costs are estimated to be $100 thousand per year. At the end of the project's
estimated life in Year 4, the company estimates it will be able to sell excess capital assets for $125,000 and the expected book value for
these items would be $0 (zero). Also at the end of the project, $40,000 of remaining inventory could be liquidated at cost. The weighted
average cost of capital is 16%, its assumed marginal income tax rate is 25%, and its capital gains tax rate is 25%.
What is the Total Annual Cash Flow for Year 2?
$648,500
$377,500
$637,500
$605,000
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