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You are considering a cost reduction project for your business. The project will require investment of $1,500,000 in new equipment as an addition to...
You are considering a cost reduction project for your business. The project will require investment of $1,500,000 in new equipment as an addition to existing equipment. The equipment has shipping and handling charges of $15,000 and will be installed for use in your facility at a cost of $100,000. The change will require an increase in inventory of $50,000 and notes payable will increase by $25,000. The equipment falls into the 3-year MACRS class (rates of 33%, 45%, 15%, and 7% in years 1-4, respectively). You expect to operate the new equipment for five years and then shut down operations. The salvage value of the equipment at time five is expected to be $250,000. The equipment change is not expected to lead to sales increases but will reduce annual operational costs by $450,000 in year 1 subsequent years savings increasing by 3%. Your business has a 40% tax rate and your WACC is 11%. Determine the time period five cash flow.
