Your company is considering an expansion of its existing facility for a new product line. The new product will require a $2.0 million investment in equipment that will be depreciated over its economic life (5 years) to $0 using the straight-line method; it is expected that the equipment can be sold for 25% of its initial book value. Expected revenues are $1,500,000 for the first year, $1.75 million in year 2, $2.1 million in year 3, $2.0 million in year 4, and $1.75 million in year 5. Production costs are initially 65% of sales in year 1 and will increase by 2% afterwards. The new line will require a one-time increase in working capital of $100,000 of which is expected to be recovered at the end of the project. The firm's tax rate is 35% and the required return for the project is 10%. How much is the total cash flow at year 5? Less than $500,000 Between $500,000 and $600,000 Between $600,000 and $700,000 Above $700,000 7.12 r
Your company is considering an expansion of its existing facility for a new product line. The new product will require a $2.0 million investment in equipment that will be depreciated over its economic life (5 years) to $0 using the straight-line method; it is expected that the equipment can be sold for 25% of its initial book value. Expected revenues are $1,500,000 for the first year, $1.75 million in year 2, $2.1 million in year 3, $2.0 million in year 4, and $1.75 million in year 5. Production costs are initially 65% of sales in year 1 and will increase by 2% afterwards. The new line will require a one-time increase in working capital of $100,000 of which is expected to be recovered at the end of the project. The firm's tax rate is 35% and the required return for the project is 10%. How much is the total cash flow at year 5? Less than $500,000 Between $500,000 and $600,000 Between $600,000 and $700,000 Above $700,000 7.12 r
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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Transcribed Image Text:Your company is considering an expansion of its
existing facility for a new product line. The new
product will require a $2.0 million investment in
equipment that will be depreciated over its economic
life (5 years) to $0 using the straight-line method;
it is expected that the equipment can be sold for
25% of its initial book value. Expected revenues
are $1,500,000 for the first year, $1.75 million in
year 2, $2.1 million in year 3, $2.0 million in year
4, and $1.75 million in year 5. Production costs are
initially 65% of sales in year 1 and will increase by
2% afterwards. The new line will require a one-time
increase in working capital of $100,000 of which is
expected to be recovered at the end of the project.
The firm's tax rate is 35% and the required return for
the project is 10%.
How much is the total cash flow at year 5?
Less than $500,000
Between $500,000 and $600,000
Between $600,000 and $700,000
Above $700,000
7.12 r
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