Universal Farm Supply's management has observed that it can sell as much fertilizer as it can stock and is considering the possibility of purchasing a forklift and expanding its warehouse space in order to be able to handle and stock more fertilizer (both are necessary to expand sales). The forklift costs Rs.42,000 and would be depreciated to a salvage value of zero in 7 years, even though it is expected to last for 10 years. The warehouse expansion would cost Rs.100,000 and would be depreciated to a salvage value of Rs.60,000 in 10 years. The expansion would allow universal to sell 1000,000 more pounds per year at Rs.0.20 per pound (the fertilizer actually costs universal Rs.0.17 per pound to manufacture). Universal's marginal tax rate is 34%, and its required rate of return is 12%. 

1. Find the net initial outlay associated with the expansion.

2. Find the annual cash flow from operations during years 1 to 7. 

3. Find the annual cash flow from operations during years 8 to 10.

4. Find the value of the terminal cash flows.

Answer rating: 100% (QA)

To calculate the net initial outlay annual cash flows and terminal cash flows associated with the expansion we need to consider the cash inflows and o... View the full answer