Question

Mideque, Inc., is considering a project to produce pens. Assume that this is a replacement project. The old equipment can be sold for $9,844 as of today. It was bought five years ago for $22,884 and is assumed to last for five more years with no salvage value at the end of its life. The initial cost of the new equipment, including transportation, installation, and so forth, is estimated to be $ 24,596. Mideque also estimates that this new equipment will save the company $3,243 per year in operating costs and increase the revenues (sales) by $964 per year over the five-year life of the project. Mideque will finance $8,202 by loan with an interest rate of 11 percent per year. The loan will be repaid at the rate of $2,206 per year plus interest on the remaining balance each year. Mideque uses straight-line depreciation, and the new equipment will have no salvage value at the end of its 5-year life. Assume a corporate-profits tax rate of 41 percent a capital-gain tax rate of 48 percent. Also, assume that the working capital requirement will be $1,053. Obtain the annual cash inflow of the last period.

Round your final answer to 2 decimal places.

Answer 1

cash inflow of Year 5
Annual savings				revenue on new equipment	24596/5	4919.2
savings in operating expense		3243		revenue on old equipment	22884/10	2288.4
increase in revenue		964		incremental depreciation		2630.8
incremental revenue		4207
less incremental depreciation		2630.8
operating profit		1576.2
less taxes-41%		646.242
after tax profit		929.958
add incremental depreciation		2630.8
add recovery of working capital		1053
annual cash flow in last year- year 5		4613.76