Locus Dominico, Company., a highly profitable maker of customized boats, is planning to introduce a new model shortly. The firm must purchase equipment immediately at a cost of Sh.900,000. Freight and installation costs for this equipment will be Sh.100,000. The equipment will be depreciated as a 5-year class asset under income tax act(straight line depreciation method). During the first year, Locus will have incremental operating expenses of Sh.300,000 that are attributable to this project. Locus expects to be able to sell 1,000 boats during year 2 at an average price of Sh.800 each and to incur operating expenses of Sh.300,000. Also, Locus expects its net working capital investment will increase by Sh.50,000 during year 2. (Assume all operating costs and revenues are incurred at the end of each year.) The marginal tax rate for Locus is 40 percent. Required: What is the required net investment and what are the year 1 and year 2 net cash flows

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
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(b) Locus Dominico, Company., a highly profitable maker of customized boats, is

planning to introduce a new model shortly. The firm must purchase equipment

immediately at a cost of Sh.900,000. Freight and installation costs for this equipment will

be Sh.100,000. The equipment will be depreciated as a 5-year class asset under income

tax act(straight line depreciation method). During the first year, Locus will have

incremental operating expenses of Sh.300,000 that are attributable to this project. Locus

expects to be able to sell 1,000 boats during year 2 at an average price of Sh.800 each and

to incur operating expenses of Sh.300,000. Also, Locus expects its net working capital

investment will increase by Sh.50,000 during year 2. (Assume all operating costs and

revenues are incurred at the end of each year.) The marginal tax rate for Locus is 40

percent.

Required:

What is the required net investment and what are the year 1 and year 2 net cash flows

 

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