What is the appropriate amount to use as initial cash flow

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Reference no: EM131606271

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Use the following information for Problem 2: After reading a demographic study on the diet and exercise habits of the American public, your company has asked you to determine whether or not to go ahead with the introduction of a new line of bicycles. They have given you the following information:

• Most of the numbers for your estimates come from a study by marketing consultant that you received two months ago. The consulting fee was $10,000.

• You will locate the production line for the product in a currently unused warehouse with a current after-tax market value of $400,000. The warehouse has already been depreciated so its book value is zero.

• The new equipment you must buy will cost $500,000. The equipment will be depreciated on a straight line basis over 10 years to a $0 salvage value.

• You have just received the results of a marketing survey that indicates that revenues from sale of the bicycles will be $320,000 per year for 10 years.

• Variable costs will be 50% of sales per year.

• At the end of the 10 years you estimate that you can sell the warehouse and equipment for $30,000.

• Your marginal tax rate is 35%.

2. What is the appropriate amount to use as the initial (time zero) cash flow?

Reference no: EM131606271

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