QUESTION 1

Answer the following 3 questions using the information below:

a. The managers of Classic Autos Incorporated plan to manufacture classic Thunderbirds (1957 replicas). The necessary foundry equipment will cost a total of $4,000,000 and will be depreciated using a five-year MACRS life. Projected sales in annual units for the next five years are 300 per year. If sales price is $27,000 per car, variable costs are $18,000 per car, and fixed costs are $1,200,000 annually, what is the operating cash flow at year one if the tax rate is 30%?

$1,290, $1,434, $1,280, or $1,188

b. The equipment is sold for salvage for $500,000 at the end of year five. What is the after tax cash flow of the salvage?

$419,120, $269,600, $500,000, or $80,880

c. What is the incremental cash flow of the project in year 5?

$2,207,000, $1,188,000, $1,280,000, or $1,290,000