1. Stark Industries wants to add a production line. The company will spend $350,000 to expand its current building and purchase $2 million in new equipment. The company expects to sell its current building, inventory, and new equipment when it moves in five years. Stark Industries thinks the building expansion will add $65,000 to the price the building can be sold for (which it originally estimated at $100,000), and that the equipment will have a market value of $200,000 at that time. The new equipment falls into the MACRS five-year class, and the building improvements fall into the “Nonresidential Real Estate” 31.5 years MACRS category. The new production line is expected to produce 127,500 units per year of the new product, which will have a selling price of $8.21 per unit and a variable cost of $3.66 per unit. Selling the new product will probably cause sales of existing products to decline by $96,500 per year, but existing costs will decrease by $53,000 per year. Fixed costs for the new production line will be $172,000 per year and the company expects NWC to increase by $1,650,000 when the new line is added. If the company falls in the 20 percent tax bracket, what are the total expected cash flows (free cash flows) for the project? 

2. Should Stark Industries pursue the project in problem 1? Explain your answer using numbers to back up your answer. 

Answer rating: 100% (QA)

DEPRECIATION TAX SHIELD Cost of Equipment 2500000 Year 1 2 4 5 5 Year MACRS depreciatio... View the full answer