Cash Flow Analysis. Biometric Devices, Inc., is analyzing the potential profitability of three potential new testing devices:
Assume that: (1) The company's marginal city-plus-state-plus-federal tax rate is 40%, (2) each product is expected to have a three-year life, (3) the firm uses straight-line depreciation, (4) the average cost of capital is 20%, (5) the products have the same risks as the firm's other business, and (6) the company has already spent $25,000 on research and development (R&D) for these products. This $250,000 has been capitalized and will be amortized over the life of the product chosen, if any.
A. What is the expected net cash flow each year? (Hint: Cash flow equals net profit after taxes plus depreciation and amortization charges.)
B. What is the net present value of each product? Which product, if any, should BDI introduce?

Question

Cash Flow Analysis. Biometric Devices, Inc., is analyzing the potential profitability of three potential new testing devices:
  Assume that: (1) The company's marginal city-plus-state-plus-federal tax rate is 40%, (2) each product is expected to have a three-year life, (3) the firm uses straight-line depreciation, (4) the average cost of capital is 20%, (5) the products have the same risks as the firm's other business, and (6) the company has already spent $25,000 on research and development (R&D) for these products. This $250,000 has been capitalized and will be amortized over the life of the product chosen, if any.
A. What is the expected net cash flow each year? (Hint: Cash flow equals net profit after taxes plus depreciation and amortization charges.)
B. What is the net present value of each product? Which product, if any, should BDI introduce?

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The Answer of Cash Flow Analysis. Biometric Devices, Inc., is analyzing the potential profitability of three potential new testing devices:
  Assume that: (1) The company's marginal city-plus-state-plus-federal tax rate is 40%, (2) each product is expected to have a three-year life, (3) the firm uses straight-line depreciation, (4) the average cost of capital is 20%, (5) the products have the same risks as the firm's other business, and (6) the company has already spent $25,000 on research and development (R&D) for these products. This $250,000 has been capitalized and will be amortized over the life of the product chosen, if any.
A. What is the expected net cash flow each year? (Hint: Cash flow equals net profit after taxes plus depreciation and amortization charges.)
B. What is the net present value of each product? Which product, if any, should BDI introduce?