Consider the case of Collins Construction Co.: Collins Construction Co. currently earns annual revenues of $900,000 and incurs total operating expenses (excluding depreciation and interest expense) of 42.50% of revenues. Its earnings are taxed at a rate of 40%. Today, its budgeting committee is evaluating the purchase of a new forklift. The forklift is expected to cost $80,000, plus $4,000 in freight and setup expenses, and will be depreciated using straight-line depreciation. It is expected that the forklift will have a useful life of ten years and a salvage value equal to 25.00% of its purchase price of $80,000. It is expected that the forklift will be sold for its book value,
Consider the case of Collins Construction Co.: Collins Construction Co. currently earns annual revenues of $900,000 and incurs total operating expenses (excluding depreciation and interest expense) of 42.50% of revenues. Its earnings are taxed at a rate of 40%. Today, its budgeting committee is evaluating the purchase of a new forklift. The forklift is expected to cost $80,000, plus $4,000 in freight and setup expenses, and will be depreciated using straight-line depreciation. It is expected that the forklift will have a useful life of ten years and a salvage value equal to 25.00% of its purchase price of $80,000. It is expected that the forklift will be sold for its book value,
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Consider the case of Collins Construction Co.:
Collins Construction Co. currently earns annual revenues of $900,000 and incurs total operating expenses (excluding depreciation and interest expense) of 42.50% of revenues. Its earnings are taxed at a rate of 40%.
Today, its budgeting committee is evaluating the purchase of a new forklift. The forklift is expected to cost $80,000, plus $4,000 in freight and setup expenses, and will be depreciated using straight-line depreciation. It is expected that the forklift will have a useful life of ten years and a salvage value equal to 25.00% of its purchase price of $80,000. It is expected that the forklift will be sold for its book value, such that no capital gain or loss will be realized.
It is further expected that the forklift will cause a 30.00% increase in the firm’s annual sales and total operating expenses (excluding depreciation and interest expense). If the forklift is purchased, the firm will require an additional $10,000 in net working capital (NWC).
What is the annual depreciation expense for the forklift?
What is the net investment (NINV) of the investment?
What are the net annual operating after-tax cash flows associated with this project?
What is the project’s last year (terminal) cash flow?
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