Kaslo Corporation is planning to sell a new mineral that it can extract in addition to its normal product line. This requires new equipment costing S600,000 and will be depreciated over 5 years for tax purposes in the following manner: Year I , 20%; Year 2,32%; Year 3,16%; Year 4,1 6%; and Year 5, l 6%. The company will use a $0 salvage value in computing the depreciation. In addition, in order to finance the additional sales and inventory from the new mineral, the company will have to invest an additional $100,000 in working capital at the beginning of the project, which will be returned for general operating use at the end of the five years. In addition, when the project is over, the company can sell the used equipment for $25,000 to another company that has a use for such equipment. The expected additional cash revenues and cash expenses in current dollars, to be earned and incurred evenly throughout each year, from sale of the new mineral are shown below KASLO CORPORATION ESTIMATED CASH REVENUES AND CASH EXPENSES FROM PROPOSED CAPITAL INVESTMENT IN CURRENT DOLLARS Year Cash Revenues Cash Expenses 500,000S 575,000 630,000 680,000 600,000 300,000 400,000 500,000 555,000 480,000 The company desires an after tax rate of return, unadjusted for inflation, of 10%. Inflation is expected to average 3% per year over the life of the equipment. The company also desires all projects to pay back their investment in 4 years or less on an after tax basis. The company's average tax rate is 30%
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