Question: You are considering whether to start a new 5-year project (Project A). Project A requires the purchase of $500 of equipment that will be depreciated
You are considering whether to start a new 5-year project (Project A). Project A requires the purchase of $500 of equipment that will be depreciated using straight-line depreciation to a zero book value over the project's life. The project also requires an initial investment of $50 for net working capital, which will be recovered at the end of the project, and will generate revenues from sales in the amount of $250 a year. In the first two years, it is estimated that the new project will have a negative impact on an already existing project (Project B) of yours. In particular, sales from Project B will decrease by $60 in year 1 and by $40 in year 2. Costs of production are $0 for both projects. The tax-rate is 34% and your required rate of return is 20%. What is the incremental cash flow associated to Project A?
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