Table 11.3
Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs $50,000 and has installation costs of $3,000. The asset will be depreciated using a five-year recovery schedule. The existing equipment, which originally cost $25,000 and will be sold for $10,000, has been depreciated using an MACRS five-year recovery schedule and three years of depreciation has already been taken. The new equipment is expected to result in incremental before-tax net profits of $15,000 per year. The firm has a 40 percent tax rate.
-The cash flow pattern for the capital investment proposal is ________. (See Table 11.3)

Question

Quizplus · Accepted Answer

The cash flow pattern for the capital investment proposal is a mixed stream because it involves different amounts over the project's life, including the initial investment, sale of old equipment, and annual net profits. It is conventional because it starts with an initial outflow followed by inflows.

Table 11.3 Cuda Marine Engines, Inc. Must Develop the Relevant Cash Flows