Question

The Taylor Mountain Uranium Company currently has annual cash revenues of $1.1 million and annual cash expenses of $600,000. Depreciation amounts to $100,000 per year. These figures are expected to remain constant for the foreseeable future (at least 15 years). The firm’s marginal tax rate is 40 percent.
A new high-speed processing unit costing $1 million is being considered as a potential investment designed to increase the firm’s output capacity. This new piece of equipment will have an estimated usable life of 8 years and a $0 estimated salvage value. If the processing unit is bought, Taylor’s annual revenues are expected to increase to $1.5 million and annual expenses (exclusive of depreciation) will increase to $800,000. Annual depreciation will increase to $200,000. Assume that no increase in net working capital will be required as a result of this project.

1. Compute the project’s annual net cash flows for the next 8 years, assuming that the new processing unit is purchased. Enter your answer in thousands. For example, an answer of $1 thousand should be entered as 1, not 1,000. Round your answer to the nearest whole number.

   $   thousand

2. Compute the net investment (NINV) for this project. Round your answer to the nearest dollar.

   $  

Please use formulas and equations and show all steps!!

Answer 1

Net investment will be 1 million.