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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.



What is the terminal cash flow in year seven? In other words, what is the annual after-tax cash flow in year seven? Do not forget any additional cash flows (inventory) associated with the termination of the equipment?

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 2 years ago
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