Answered: Data for all Milton Industries problems…

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 1P: Talbot Industries is considering launching a new product. The new manufacturing equipment will cost...

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Data for all Milton Industries problems are the same. Milton Industries wants to purchase new equipment that has a quoted price of $1,000,000. Milton estimates an additional cost of $75,000 will be needed today to have the equipment modified, shipped, and installed. The purchase of this additional equipment will require Milton to invest an estimated $85,000 in net working capital upfront, and this investment should be recovered when Milton sells the equipment. If purchased, the equipment will be employed for a total of six years, and then sold for an estimated $780,000. The equipment will be depreciated straight-line on a six-year schedule. During each of the years that the equipment is in service, it is expected to boost Milton’s sales revenue by $398,000 though annual operating costs (other than depreciation) are also expected to be higher, to the extent of $94,000. Milton faces a marginal tax rate of 35%, and its cost of capital is 10.5%. The amount of initial (time 0) outflow of cash for this project is expected to be:

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