2 Incremental costs Initial and terminal cash flow Aa Aa Co

2. Incremental costs - Initial and terminal cash flow Aa Aa Consider the case of Acme Manufacturing: Acme Manufacturing is considering a project that requires an investment in new equipment of $4,200,000, with an additional $210,000 in shipping and installation costs. Acme estimates that its accounts receivable and inventories need to increase by $840,000 to support the new project, some of which is financed by a $336,000 increase in spontaneous liabilities (accounts payable and accruals) The total cost of Acme\'s new equipment is and consists of the price of the new equipment plus the $4,410,000 $840,000 $4,914,000 In contrast, Acme\'s initial net investment d

Solution

The total cost of Acme’s new equipment is $4,410,000 and consists of the price of the new equipment plus the asset’s installation, shipping and delivery costs. In contrast, Acme’s initial net investment outlay is $4,914,000.

If the firm’s tax rate is 40%, what is the project’s total termination cash flow? $1,224,000

Calculations and explanations:

Cost of new equipment = $4,200,000+210,000 = 4,410,000

This includes 4,200,000 of price of the new equipment and $210,000 of shipping and installation costs.

Total initial investment = 4,200,000+210,000+(840,000-336,000)

= 4,200,000+210,000+504,000

= 4,914,000

Terminal cash flow = after tax salvage value+recovery of net working capital

= 1,200,000*(1-40%)+(840,000-336,000)

= 720,000+504,000

= 1,224,000