Question

Keith Urban Bookstores is considering a major expansion of its business. The details of the proposed expansion project are summarized below: The company will have to purchase $500,000 in equipment at t 0. This is the depreciable cost. . The project has an economic life of four years. . The cost can be depreciated on a MACRS 3-year basis, which implies the following depreciation schedule: MACRS Depreciation Year Rates 0.33 0.45 0.15 0.07 4 . At t 0, the project requires that inventories increase by $50,000 and accounts payable increase by $10,000. The change in net operating working capital is expected to be fully recovered at t 4. (Hint: NWC CA-CL) The project's salvage value at the end of four years is expected to be $0. The company forecasts that the project will generate $800,000 in sales the first two years (t 1 and 2) and $500,000 in sales during the last two years (t 3 and . Each year the project's operating costs excluding depreciation are expected to be 60% of sales revenue. The company's tax rate is 40%. The project's cost of capital is 10%. . . . What is CFFA at year 0? a. -$540,000 b. $560,000 c. $570,000 d. -$500,000 What is CFFA at year 4? a. $150,000 b. $174,000 c. $282,000 d. $500,000