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.
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