Passionfruit Corporation is considering whether to replace its old canner with a new one that costs $500,000 and is expected to have a five-year useful life. The company will take out a $300,000 loan to partially finance the acquisition.

Although fully depreciated for tax purposes, the old machine can be sold for $50,000 today.

The new machine will result in a $5,000 reduction in inventory from the current $60,000 level. However, it is estimated to increase $7,000 from the current level of accounts payable.

Passionfruit Corporation spent $150,000 last year rebranding its canned goods. The marketing manager now wants the labels on the boxes to be printed on glossy plastic-coated paper, which requires a special printer. The company has such a printer in its warehouse. This printer has a market value of $12,000 and book value of $8,000. Since the printer is not currently in use, the marketing manager recommends that there be no charge for using it to print new labels.

Suppose the corporate tax rate is 30%.

What are 'initial cash flows'?

Answer rating: 100% (QA)

Initial cash flows refer to the cash inflows and outflows that occur ... View the full answer