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In: Finance
Green House Tomato Company is considering the purchase of new processing equipment for $1,500,000, with an...
Green House Tomato Company is considering the purchase of new
processing equipment for $1,500,000, with an additional
installation cost of $18,000. The new equipment will result in
earnings before interest and taxes of $450,000 per year, and to
operate the equipment properly, workers would have to go through an
initial training session costing the company $50,000. In addition,
because the equipment is extremely efficient, its purchase
necessitates an increase in inventory of $90,000. Assume the
company uses straight-line depreciation, the equipment has an
expected life of seven years, the equipment will have no salvage
value, the marginal tax rate is 28 percent, and the company has a
required rate of return of 12 percent.
Solutions
Expert Solution
First of all lets find depreciation
Depreciation = Cost price - Salvage value / Usefull life of asset
Cost price = Purchase price + Installation + Training cost
= 1500000 + 18000 + 50000
= 1568000 $
Now depreciation = 1568000 - 0 /7
= 1568000 / 7
= 224000 $
Statement showing terminal cash flow
| Particulars | Amount |
| EBIT | 450000 |
| Less tax @ 28% | 126000 |
| PAT | 324000 |
| Add: Depreciation | 224000 |
| Annual cah flow | 548000 |
| Add: Release of WC | 90000 |
| Termianl cash flow | 638000 |
Thus Terminal cash flow = $638000
jeff jeffy answered 1 year agoRelated Solutions
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