Freida Company is considering an asset replacement project of replacing a control device. This old control device has been fully depreciated but can be sold for $5,000. The new control device, which is more automated, will cost $42,000. The new device’s installation and shipping costs will total $16,000. The new device will be depreciated on a straight-line basis over its 2-year economic life to an estimated salvage value of $0. The actual salvage value of this device at the end of 2-year period (That is, the market value of the device at the end of 2-year period) is estimated to be $4,000. If the replacement project is accepted, Freida will require an initial working capital investment of $2,200 (that is, adding $2,200 initially to its net working capital). During the 1st year of operations, Freida expects its annual revenue to increase from $72,800 to $90,000. After the 1st year, revenues from the replacement are expected to increase at a rate of $2,800 a year for the remainder of the project life. Freida's incremental operating costs associated with the replacement project are expected to decrease from $36,000 to $19,000 during the 1st year and increase at a rate of $2000 for the remainder of the project life. Freida expects that it will have to add about $2,800 to its net working capital in year 1, and nothing in year 2. At the end of the project, the total accumulated net working capital required by the project will be recovered. Freida has a marginal tax rate of 30%. What is Freida's net operating cash flows at the end of year 2 ?
Freida Company is considering an asset replacement project of
replacing a control device. This old control device has been fully
is more automated, will cost $42,000. The new device’s installation and
shipping costs will total $16,000. The new device will be depreciated
on a straight-line basis over its 2-year economic life to an estimated
salvage value of $0. The actual salvage value of this device at the end
of 2-year period (That is, the market value of the device at the end of
2-year period) is estimated to be $4,000. If the replacement project is
accepted, Freida will require an initial working capital investment of
$2,200 (that is, adding $2,200 initially to its net working capital).
During the 1st year of operations, Freida expects its annual revenue to
increase from $72,800 to $90,000. After the 1st year, revenues from
the replacement are expected to increase at a rate of $2,800 a year for
the remainder of the project life.
Freida's incremental operating costs associated with the replacement
project are expected to decrease from $36,000 to $19,000 during the
1st year and increase at a rate of $2000 for the remainder of the
project life.
Freida expects that it will have to add about $2,800 to its net working
capital in year 1, and nothing in year 2. At the end of the project, the
total accumulated net working capital required by the project will be
recovered.
Freida has a marginal tax rate of 30%.
What is Freida's net operating cash flows at the end of year 2 ?
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