Meals on Wings Inc.,which supplies prepared meals for corporate aircraft,needs to purchase new broilers.The new broilers would replace broilers purchased 10 years ago for $105,000,which are being depreciated on a straight-line basis to a zero salvage value (15-year depreciable life).The old broilers can be sold today for $63,000.The new broilers will cost $202,000,installed (not counting funds already spent),and will be depreciated using straight-line depreciation over their 5-year life.They will be sold at their book value at the end of the 5th year.The firm expects to increase its revenues by $27,000 per year if the new broilers are purchased,but cash expenses will also increase by $3,000 per year.Annual interest expense will be $2,000,and net working capital will increase by $5,000.The new broilers will occupy space currently leased to another firm for $530 per month,and $5,000 has already been spent preparing the building for new broilers.The firm's tax rate is 40%.What is the initial cash flow for the project? Round your answers to the nearest dollar.

Question

Quizplus · Accepted Answer

Initial Cash Flow = -(Price of new asset) + (Net Salvage value of old asset) - (Increase in Net Working Capital) Net Salvage value = S - Tax on Sale Tax on sale = T × (S - B) ADepr = 10 × (105,000/15) = $70,000 B₁₀ = 105,000 - 70,000 = $35,000 Tax on Sale = 0.4 × (63,000 - 35,000) = $11,200 Net Salvage = 63,000 - 11,200 = $51,800 Initial Cash Flow = -202,300 + 51,800 - 5,000 = -$155,200