As the finance manager of a company, you are presented with the following project. The...
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Finance
As the finance manager of a company, you are presented with the following project. The company is considering the purchase of a new piece of equipment which would cost $200,000. This equipment will have a five-year useful life and have a salvage value of $0 at the end of the five-year period. It is estimated that (baseline assumptions):
the new equipment will be able to produce 10,000 shelves per year.
the incremental overhead for running the equipment will be $20,000 per year.
they can sell the shelves for $25 each.
the cost of sales is $15 per shelf.
Net Working Capital requirements for the project are as follows:
Year 0 = $10,000
Year 1 = $15,000
Year 2 = $17,000
Year 3 = $15,000
Year 4 = $10,000
The company has a 30% marginal tax rate and a cost of capital of 15%.
Question:
What is the net effect of Year 1 depreciation on Year 1 free cash flow?
A.
$40,000
B.
-$40,000
C.
0
D.
$12,000
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