Bilk.com, an online retailing company, proposes to spend $50 million on servers and other computer equipment for managing its Web site and processing orders. The company will depreciate the equipment over five years to zero. However, the company actually expects that it will be able to sell the equipment for $25 million at the end of five years. This equipment is expected to generate $30 million in sales in the first year and $21 million in cash operating costs in the first year. Both revenue and cash operating costs are expected to grow at an annual rate of 3% throughout the useful life of the equipment. There is no initial working capital requirement. However, the company will need to have a working capital balance at the end of each year equal to 20% of that year’s sales. The working capital can be fully recovered at the end of the project’s life. Bilk.com’s tax rate is 40%, and the cost of capital for this project is 8%. Calculate the cash flows in year 1. a. $2,825,000 b. $9,400,000 c. -$600,000 d. $3,400,000 e. $5,400,000
Bilk.com, an online retailing company, proposes to spend $50 million on servers and other computer equipment for managing its Web site and processing orders. The company will
Calculate the cash flows in year 1.
a. |
$2,825,000 |
|
b. |
$9,400,000 |
|
c. |
-$600,000 |
|
d. |
$3,400,000 |
|
e. |
$5,400,000 |
Trending now
This is a popular solution!
Step by step
Solved in 2 steps