Question

Company A is considering launching a new clothing line. The project would require a $25,000,000 capital investment and will be depreciated (straight-line to zero) over its 4-year life. The company discovers at the end of the project that it will be able to sell the equipment for $5,300,000 (salvage value). Incremental sales are expected to be $14,500,000 annually for the 4-year period with costs (excluding depreciation) of 55% of sales. The project would also require the company to increase inventory levels by $2,000,000. The company has a 35% tax rate.

- What is the project cash flow (Cash Flow From Assets) for Year 0?
- What is the project cash flow (Cash Flow From Assets) for Year 2?
- What is the project cash flow (Cash Flow From Assets) for Year 4?
- What is the project’s IRR?

Answer #1

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Coache Corporation is considering a capital budgeting project
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year useful life and zero salvage value. The annual incremental
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renovation expense in year 3 of $37,000. The company’s income tax
rate is 30%. The company uses straight-line depreciation on all
equipment.
The total cash flow net of income...

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expenses would be $410,000. In addition, there would be a one-time
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