Alpha Company is planning to install a new production facility. The required plant and equipment for new production unit will cost $ 470,000. In addition to the price of the plant and equipment, it will have to pay $ 20,000 for shipment and $ 80,000 for installation of the plant and equipment. It will need an additional investment of $ 120,000 in working capital. The new production unit will generate $ 380,000 sales revenue in each year for 5 years and operating cost excluding depreciation will be $ 230,000 in each year. Company will follow the straight-line depreciation method to depreciate the plant and equipment. At the end of the fifth year, plant and equipment will have $ 20,000 book value but it will be worth for $ 60,000 in the market. Company's marginal corporate tax rate is 30 %.

1. What will be the initial cash outlay?
2. What will be the annual operating cash flow of new production unit?
3. Should the company install the new production unit if its required rate of return is 15%?

4-Calculate the Pay Back period and IRR.

Answer rating: 100% (QA)

To calculate the initial cash outlay we need to sum up all the costs associated with installing the new production unit Cost of plant and equipment 47... View the full answer