Question

a) $2,560,000 b) $2,440,000 c) $2,454,700 d) $2,447,350 e) $2,432,650 1. Wellington Corporation's latest capital investment will require them to purchase new, advanced production machines The machines cost $8,000,000. They have a 5-year class life, and will be depreciated using simplified straight-line. The firm's corporate tax rate is 21%. The incremental cash inflows expected over the 5-year life of the project are $2,800.000 per year. and cash expenses are $800,000 per year. In addition, the new machines will reduce defects costs by $160,000 per year. The new machines will require a $200,000 increase in net working capital at the time of installation. At the end of 5 years, the machines will be worthless. Calculate the annual cash flow resulting from this project. a) $1,916,000 b) $1,842,400 c) $442,400 d) $1,716,000 e) $2,042,400 7. Your firm is selling a 6-year old machine that has a 10-year class life. The machine originally cost $8.000.000 and required an investment in net working capital of $100,000 at the time of installation. Your firm is selling the asset for $2,600,000. Your firm's tax rate is 21%. What is the terminal cash flow? a) $2,726,000 b) $974,000 c) $2,474,000

Answer 1

Solution :-  

Depreciation Charged annually on Machine = $8000000 / 5 = $1600000
Now Annual Cashflow with this Project
Incremental Cash Inflows				2800000
Add :- Reduction in Defect cost				160000
Less :- Cash Expenses				800000
Less :- Dep per year				1600000
Incremental Income Before Tax				560000
Less :- Tax @21%				117600
Income After Tax				442400
Add :- Dep Charged as Non Cash				1600000
Net Cash Inflow				2042400

Therefore the Correct answer is (D) that is $2042400