ABC Inc. is currently evaluating the purchase of equipment that is expected to generate the following cash
Question:
ABC Inc. is currently evaluating the purchase of equipment that is expected to generate the following cash inflows:
Year Cash flow
1 25,ooo
2 35,000
3 40,000
4 50,000
In addition, the company expects an increase in accounts receivable of $6,000 and additional inventory of $8,000, and an increase in account payable or $5,000.
The cost of the equipment is $100,000. The equipment has been allocated additional overhead expense of $3,000 annually. At the end of the 4 years, the equipment will have to be disposed of at a cost of $7,000 and will have zero market value. The company has a RRR of 10%.
1. What is the initial cash outflow due to change in working capital?
2. Is the overhead expense of $3,000 incremental or not incremental?
3. If ABC borrows the money to purchase the equipment, how are the monthly interest charges handled? Incremental or not incremental?
4. How much is the terminal cash flow?
Financial and Managerial Accounting Using Excel for Success
ISBN: 978-1111993979
1st edition
Authors: James Reeve, Carl S. Warren, Jonathan Duchac