Cash Flow Analysis. Dick Tracy has acquired a franchise to sell one of three designs of a novelty watch in the Gotham City Market:
Assume that: (1) The company's marginal city-plus-state-plus-federal tax rate is 50%, (2) each product is expected to have a four-year life, (3) the firm uses straight-line depreciation, (4) the average cost of capital is 12%, (5) the products have the same risk as the firm's other business, and (6) the company has already spent $250,000 on franchise acquisition costs. This $250,000 has been capitalized and will be amortized over the life of the design chosen.
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 design, if any, should Tracy sell?

Question

Cash Flow Analysis. Dick Tracy has acquired a franchise to sell one of three designs of a novelty watch in the Gotham City Market:
  Assume that: (1) The company's marginal city-plus-state-plus-federal tax rate is 50%, (2) each product is expected to have a four-year life, (3) the firm uses straight-line depreciation, (4) the average cost of capital is 12%, (5) the products have the same risk as the firm's other business, and (6) the company has already spent $250,000 on franchise acquisition costs. This $250,000 has been capitalized and will be amortized over the life of the design chosen.
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 design, if any, should Tracy sell?

Quizplus · Accepted Answer

The Answer of Cash Flow Analysis. Dick Tracy has acquired a franchise to sell one of three designs of a novelty watch in the Gotham City Market:
  Assume that: (1) The company's marginal city-plus-state-plus-federal tax rate is 50%, (2) each product is expected to have a four-year life, (3) the firm uses straight-line depreciation, (4) the average cost of capital is 12%, (5) the products have the same risk as the firm's other business, and (6) the company has already spent $250,000 on franchise acquisition costs. This $250,000 has been capitalized and will be amortized over the life of the design chosen.
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 design, if any, should Tracy sell?