Complete and submit the RELEVANT CASH FLOWS WORK in the required format.
Income tax rate 30% Capital gains tax rate 15%
- You are considering investing in a new asset which costs $75,000. It will cost $5,000 to install this asset. The old asset, which has a book value of $0, can be sold for $25,000. The purchase price of the old asset was $100,000. The new asset will allow you to decrease your inventory by $2,000. What is the initial investment in this asset?
- If you purchase the new asset referred to in Problem 1, it will generate revenues of $60,000 per year for the next three years. Expenses will be $20,000 per year. The asset will be depreciated using the straight-line method. The operating cash flows for the old machine are $10,000 each year. What are the marginal operating cash flows for this investment?
- Continuing with the potential investment in Problems 1 and 2, at the end of year 3, the new asset will be sold for $50,000. What is the terminal cash flow for this investment?
- Based on the cash flows you calculated last week, find the NPV and IRR for this investment. Would you invest or not? Justify your answer.
***Required Format: you must submit your homework in an Excel file. Sheet 1 must contain nothing other than the problem number and your final answer. Sheet 2 must contain the calculations you used to arrive at your final answer.