Question

Martin & Kenneth Luxury Retail Stores are planning to expand by acquiring new equipment. This investment will require a replacement of the old equipment. The acquisition cost of the new equipment is $500,000. The new investment requires an additional outlay of $45,000 to cover shipping and all the other charges. The old equipment can be sold for $90,000 in the market and the books shows the same amount. The applied tax rate for this firm is 40.00%.

This new equipment investment project is expected to increase sales revenue by $60,000, increase operating costs by $20,000 for the first year. There is also a $10,000 incremental net working capital after the project is undertaken. The old equipment is fully depreciated and the new equipment will be depreciated straight-line to a zero value over the twenty-year economic life of a project. There is $20,000 estimated salvage on the new equipment at the end of its economic life. What are the net investment and net cash flow for the first year for this investment?

Group of answer choices

NINV of $545,000 and NCF of $32,000

NINV of $455,000 and NCF of $32,000

NINV of $545,000 and NCF of $36,000

NINV of $455,000 and NCF of $36,000

Answer 1

Calculation of Net Investment in first Year

Net Investment = ( Acquisition cost of new equipment +shipping charges - Replacement cost of old equipment )

= $500,000 +$45,000 - $90,000

Net Investment = $ 455,000

NOTE: there will be no Tax on sales of $90,000 because sales value = book value, thus there is no profit on sale.

Calculation of Net cash flow in Year 1

Partculars	Amount
Increase in Revenue (a)	$60,000.00
Less: Increase in cost (b)	$20,000.00
Less: Depreciation ( c )	$27,250.00
EBIT (d =a-b-c)	$12,750.00
Less: Tax @ 40% (e = d*0.4)	$5,100.00
NOCF (f=d-e)	$7,650.00
Add: Depreciation (g = c )	$27,250.00
Less: Increase in WC (h)	$10,000.00
Net cash Flow ( I = f+g-h)	$24,900.00

To be Honest, i don't think that the given options are correct.