Question

# Kinston Limited is considering investing in new equipment that will cost 126000 dollars and will last...

Kinston Limited is considering investing in new equipment that will cost 126000 dollars and will last for three years. The equipment will be fully depreciated using the straight-line method. The equipment will generate revenues of 114000 dollars each year and the cost of goods sold will be 50% of sales. At the end of year three, the equipment will be sold for 15000 dollars. The appropriate cost of capital is 10% and Kinston’s tax rate is 35%.

What is the free cash flow in the final year (i.e., free cash flows in year three)? (Round your final answer to the nearest dollar if needed)

Note: For all the calculation questions, you are only allowed to write the numerical answer you calculated for the question, please DO NOT add \$, %, dollars, million, thousand, percent, space, etc. in your answers.

Sales in third year = 114000

Cost of goods sold = 114000 * 0.50 = 57000

Depreciation in 3rd year = 126000 / 3 = 42000

Depreciation tax shield in 3rd year = 42000 * 35% = 14700

Profit on sale of equipment = 15000 - 0 = 15000

Tax on profit on sale of equipment = 15000 * 35% = 5250

Free cash flow in Year 3 = (Sales - Cost) * (1 - Tax rate) + Depreciation tax shield + Profit on sale of equipment - Tax on profit

= (114000 - 57000) * (1 - 0.35) + 14700 + 15000 - 5250

= 61500

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