CashFlows - Ch . 1 1 : Capital Budgeting Cash Flows 1....

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Ch. 11: Capital Budgeting Cash Flows 1. Gizmo Corporation expects rapidly increasing demand for gizmos, and is considering expansion of its production facility. The project would require the firm to purchase new equipment and upgrade old software. The cost of the new equipment is $1,250,000. Delivery would cost $50,000 and installation would amount to $30,000. The equipment would have a class life of 7 years, but the firm is planning to keep the equipment for 5 years. Gizmo executives expect to be able to sell the equipment for $200,000 at the end of the fifth year. A one-time working capital investment of $40,000 would be required at the time of installation. The firm would also be required to train employees to use the new equipment. The training program would cost $5,000. Gizmo Corporation uses simplified straight line depreciation, has a marginal cost of capital of 11 percent, and has a marginal tax rate of 34 percent. Since the capital investment represents expansion of the firm's current line of business, the risk of the project is equivalent to the overall risk of the firm. Following are current annual sales and expense figures, and forecasts of annual sales and expense numbers if the capital investment project is undertaken. Existing With new equipment Sales $2,750,000 $3,500,000 Cash operating expenses 1,200,000 1,400,000 Cost of defects 40,000 15,000 Maintenance cost 20,000 30,000 Should the firm invest in this expansion project?
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2. Maddux, Inc. is planning to purchase equipment worth $400,000. Delivery and setup costs will amount to $20,000. In addition, $25,000 in net working capital will be required at installation. The equipment will have a 5 year class life and will be depreciated using simplified straight line. Maddux has a marginal tax rate of 34 percent and a cost of capital of
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This note was uploaded on 12/07/2010 for the course ACG 3361, 4401 taught by Professor Goldwater,canada,judd,byrd,theniel during the Spring '10 term at University of Central Florida.

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CashFlows - Ch . 1 1 : Capital Budgeting Cash Flows 1....

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