Carrack Company is trying to decide whether to launch a new product line, which would require...
Carrack Company is trying to decide whether to launch a new product line, which would require an initial investment of $3,500,000. Each year, the new product should bring in $1,100,000 in revenues, but would cost $450,000 to manufacture. The product should have a 10-year life, after which the equipment associated with it could be sold for $150,000. To make room for the new production line, Carrack would sell a piece of equipment with a book value of $40,000 for $25,000. Carrack has an effective tax rate of 25%, and a required rate of return of 10%. How to find annual cash flow for this question? The answer is 571250 but I don't know how to get that answer.
Homework Answers
| Annual cash flows | |
| Revenue | $1,100,000 |
| Less: Cost | $450,000 |
| Less: Depreciation ($3,500,000 - $150,000)/10 years | $335,000 |
| Earning before tax | $315,000 |
| Less: Tax @25% | $78,750 |
| Earning after tax | $236,250 |
| Add: Depreciation | $335,000 |
| Annual cash flows | $571,250 |
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