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Milton Industries wants to purchase new equipment that has a quoted price of $1,000,000. Milton estimates...

Milton Industries wants to purchase new equipment that has a quoted price of $1,000,000. Milton estimates an additional cost of $95,000 will be needed today to have the equipment modified, shipped, and installed. The purchase of this additional equipment will require Milton to invest an estimated $65,000 in net working capital upfront, and this investment should be recovered when Milton sells the equipment. If purchased, the equipment will be employed for a total of five years, and then sold for an estimated $680,000. The equipment will be depreciated straight-line on a five-year schedule. During each of the years that the equipment is in service, it is expected to boost Milton’s sales revenue by $278,000 though annual operating costs (other than depreciation) are also expected to be higher, to the extent of $74,000. Milton faces a marginal tax rate of 25%, and its cost of capital is 7.00%.  The annual net cash flow from this project for each of the years 1 through 4 is:

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Expert Solution

Annual net cash flow = income after tax + depreciation

depreciation = total cost of equipment / depreciable life

total cost of equipment = purchase cost + cost of shipping and installation

Annual net cash flow = $207,750

jeff jeffy answered 1 year ago
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