What is the Year-0 net cash flow? What are the net operating cash flows in Years 1, 2, and 3? What is the additional Year-3 cash flow (i.e., the after-tax salvage and the return of working capital)? If the project’s cost of capital is 12%, should the machine be purchased?

What is the Year-0 net cash flow? What are the net operating cash flows in Years 1, 2, and 3? What is the additional Year-3 cash flow (i.e., the after-tax salvage and the return of working capital)? If the project’s cost of capital is 12%, should the machine be purchased?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 10P

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

A Company is considering adding a new machine to its production line. Its base price is Rs.10,00,000, and it would cost Rs. 30,500 to install it. The would be depreciated on a straight-line basis, and it would be sold after 3 years for Rs. 600,000. The machine would require an increase in net working capital (inventory) of Rs.15,000. This machine is expected to save the company Rs. 300,000 per year in after-tax operating costs. The company’s tax rate is 30%.

What is the Year-0 net cash flow?
What are the net operating cash flows in Years 1, 2, and 3?
What is the additional Year-3 cash flow (i.e., the after-tax salvage and the return of working capital)?
If the project’s cost of capital is 12%, should the machine be purchased?

Definition Video Definition Accounting method wherein the cost of a tangible asset is spread over the asset's useful life. Depreciation usually denotes how much of the asset's value has been used up and is usually considered an operating expense. Depreciation occurs through normal wear and tear, obsolescence, accidents, etc. Video

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