Eggers & Hobbs, Inc., is considering the addition of a new maintenance services division. Opening the...
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Eggers & Hobbs, Inc., is considering the addition of a new maintenance services division. Opening the division will require a new building, staff, and equipment. The proposed plan involves purchasing land that is currently selling for $300,000. The price of constructing the building on this land is $1.5 million and should be finished before operations begin in year 1. The building will be depreciated straight-line to a book value of zero over 10 years. New equipment will cost $200,000 upfront, and will be depreciated straight line to zero over 4 years. An HR team will need to be brought on for hiring new staff. They estimate that the upfront cost of hiring will be $80,000. In addition, a sales forecast has already been formed for the project and the incurred fee for this service is $150,000. The team forecasts sales of $400,000, $800,000, $600,000, and $300,000 for years 1 through 4 respectively. Operating costs are estimated to be $300,000 each year. At the end of year 4, the division is expected to be shut down due to industry competition. At this time, the building will be re-purposed, although analysts estimate that the land will hold a market value of $300,000 and the building will hold a market value of $750,000. The equipment is expected to hold no salvage value by the end of year 4. E&H's tax rate is 20%. Calculate the annual net cash flows for cach year for this project. Use the following worksheet to write out each cash flow. This worksheet is provided to help you organized your work in an orderly manner - you may wish to write out your solution on scratch paper before transferring your final answer to this sheet. Year 0 Year 1 Year 2 Year 3 Year 4 Net Cash Flow Eggers & Hobbs, Inc., is considering the addition of a new maintenance services division. Opening the division will require a new building, staff, and equipment. The proposed plan involves purchasing land that is currently selling for $300,000. The price of constructing the building on this land is $1.5 million and should be finished before operations begin in year 1. The building will be depreciated straight-line to a book value of zero over 10 years. New equipment will cost $200,000 upfront, and will be depreciated straight line to zero over 4 years. An HR team will need to be brought on for hiring new staff. They estimate that the upfront cost of hiring will be $80,000. In addition, a sales forecast has already been formed for the project and the incurred fee for this service is $150,000. The team forecasts sales of $400,000, $800,000, $600,000, and $300,000 for years 1 through 4 respectively. Operating costs are estimated to be $300,000 each year. At the end of year 4, the division is expected to be shut down due to industry competition. At this time, the building will be re-purposed, although analysts estimate that the land will hold a market value of $300,000 and the building will hold a market value of $750,000. The equipment is expected to hold no salvage value by the end of year 4. E&H's tax rate is 20%. Calculate the annual net cash flows for cach year for this project. Use the following worksheet to write out each cash flow. This worksheet is provided to help you organized your work in an orderly manner - you may wish to write out your solution on scratch paper before transferring your final answer to this sheet. Year 0 Year 1 Year 2 Year 3 Year 4 Net Cash Flow
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Answer Intial Investment Land 300000 Bulding 1500000 Total Intial Investm... View the full answer
Related Book For
Managerial Economics Theory Applications and Cases
ISBN: 978-0393912777
8th edition
Authors: Bruce Allen, Keith Weigelt, Neil A. Doherty, Edwin Mansfield
Posted Date:
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