Net working capital requirement

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Reference no: EM131178139

Two years ago our company bought equipment for $1 million that has been depreciated straight line over a five-year life. Key points to consider: The equipment has a current market value of $300,000. More efficient equipment can be purchased today for $3 million and is expected to last 5 years (economic life), at which time its anticipated salvage value would be $300,000. However, the new equipment would be depreciated straight line over only four years to a zero salvage value. Our company would realize a $1,000,000 per year operating cost savings by replacing the old equipment with the new equipment. Also, the Net Working Capital Requirement would decrease by $75,000 as soon as the equipment is purchased, but would increase when it is sold at the end of its economic life (5 years). The marginal tax rate is 30%. Required: Identify the relevant cash flows for this project.

Reference no: EM131178139

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