America Inc., is considering the addition of a new maintenance services division. Opening the division will require a new building, staff, and equipment. The proposed plan involves purchasing land that is currently selling for $750,000. The price of constructing the building on this land is $4.5 million and should be finished before operations begin in year 1. The building will be depreciated straight-line to a book value of $500,000 over 20 years. New equipment will cost $200,000 upfront, and will be depreciated straight line to zero over 4 years. An HR team will need to be brought on for hiring new staff. They estimate that the upfront cost of hiring will be $210,000. In addition, a sales forecast has already been formed for the project and the incurred fee for this service is $90,000. The team forecasts sales of $900,000, $800,000, $600,000, and $300,000 for years 1 through 4 respectively. In each year, inventory equal to one tenth of the current year’s revenue will be required. Operating costs are estimated to be $300,000 each year. At the end of year 4, the division is expected to be shut down due to industry competition. At this time, the building will be re-purposed, although analysts estimate that the land will hold a market value of $900,000 and the building will hold a market value of $3.5 million. The equipment is expected to hold no salvage value by the end of year 4. America’s tax rate is 25%. Calculate the annual net cash flows for each year for this project. please do not give handwritten solution thanku

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section14.A: Breakeven Analysis

Problem 8P

See similar textbooks

Related questions

Question

America Inc., is considering the addition of a new maintenance services division. Opening the division will require a new building, staff, and equipment. The proposed plan involves purchasing land that is currently selling for $750,000. The price of constructing the building on this land is $4.5 million and should be finished before operations begin in year 1. The building will be depreciated straight-line to a book value of $500,000 over 20 years. New equipment will cost $200,000 upfront, and will be depreciated straight line to zero over 4 years. An HR team will need to be brought on for hiring new staff. They estimate that the upfront cost of hiring will be $210,000. In addition, a sales forecast has already been formed for the project and the incurred fee for this service is $90,000. The team forecasts sales of $900,000, $800,000, $600,000, and $300,000 for years 1 through 4 respectively. In each year, inventory equal to one tenth of the current year’s revenue will be required. Operating costs are estimated to be $300,000 each year. At the end of year 4, the division is expected to be shut down due to industry competition. At this time, the building will be re-purposed, although analysts estimate that the land will hold a market value of $900,000 and the building will hold a market value of $3.5 million. The equipment is expected to hold no salvage value by the end of year 4. America’s tax rate is 25%.