What are the operating cash flows in years

Assignment Help Financial Management

Reference no: EM132000833

Stanton Inc. is considering the purchase of a new machine which will increase earnings before depreciation and taxes by $1,000 annually but will not affect the cost (i.e., will increase revenues but will not affect the cost). The price of this machine including modification and installations is $50,000. Stanton will use the MACRS method to depreciate the machine and it expects to sell the machine at the end of its 4-year operating life for $10,000 before taxes. In addition, there would be an increase of $3000 in networking capital. Stanton's marginal tax rate is 40% and it uses a 10% cost of capital to evaluate projects of this type.

Year MACRS 3-year class

Recovery allowance percentage 33%

1 33%

2 45%

3 15%

4 7%

a) What is the initial cash outlay (at time zero)?

b) What are the operating cash flows (OCF) in years 1 through 4?

c) What is the terminal cash flow at the end of the 4th year?

d) Show your findings in parts a-c on the timeline.

e) What is the project's NPV? f) Given the NPV you calculated, should the firm undertake the project?

Reference no: EM132000833

Questions Cloud

What is the market value of the company stock : Bruin Inc. will have earnings of $15 million next year and is projected to grow at constant rate of 6 percent forever. What is market value of company stock?

Estimate term structure of discount factors : Estimate term structure of discount factors, spot rates and forward rates by using data on five semi-annual coupon paying bonds with $100 face value each.

Chinese yuan overvalued or undervalued : According to purchasing power parity, is Chinese Yuan overvalued or undervalued? Why?

How large should mei dividend payout ratio be next year : According to the residual distribution model (assuming all payments are in the form of dividends), how large should Mei’s dividend payout ratio be next year?

What are the operating cash flows in years : What is the initial cash outlay (at time zero)? What are the operating cash flows (OCF) in years 1 through 4?

Taken into account when valuing publicly traded stock : Which of the following can be taken into account when valuing publicly traded stock?

Explain why the pre-payment premium is not constant : Explain why the pre-payment premium is not constant on January 17, 2018.

Fixed rate mortgage and arm mortgage : What is the difference between a 30-year fixed rate mortgage and an ARM mortgage? Why would a borrower choose one over the other?

Issuing new equity and increase in debt financing required : Calculate the maximum investment funds available without issuing new equity and the increase in debt financing required.

User Account

All Pages