FITCO is considering the purchase of new equipment. The equipment costs $328000, and an additional $109000 is needed to install it. The equipment will be depreciated straight-line tozero over a 5-year life. The equipment will generate additional annual revenues of $260000, and it will have annual cash operating expenses of $83000. The equipment will be sold for$82000 after 5 years. An inventory investment of $74000 is required during the life of the investment. FITCO is in the 40 percent tax bracket, and its cost of capital is 9 percent. What is theproject NPV?O $118134.$83826.$100605$67757

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Asked Oct 20, 2019
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FITCO is considering the purchase of new equipment. The equipment costs $328000, and an additional $109000 is needed to install it. The equipment will be depreciated straight-line to
zero over a 5-year life. The equipment will generate additional annual revenues of $260000, and it will have annual cash operating expenses of $83000. The equipment will be sold for
$82000 after 5 years. An inventory investment of $74000 is required during the life of the investment. FITCO is in the 40 percent tax bracket, and its cost of capital is 9 percent. What is the
project NPV?
O $118134.
$83826.
$100605
$67757
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FITCO is considering the purchase of new equipment. The equipment costs $328000, and an additional $109000 is needed to install it. The equipment will be depreciated straight-line to zero over a 5-year life. The equipment will generate additional annual revenues of $260000, and it will have annual cash operating expenses of $83000. The equipment will be sold for $82000 after 5 years. An inventory investment of $74000 is required during the life of the investment. FITCO is in the 40 percent tax bracket, and its cost of capital is 9 percent. What is the project NPV? O $118134. $83826. $100605 $67757

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Expert Answer

Step 1

The purchase cost of new equipment is $328,000 and installation cost is $109,000. So, the total cost over new equipment will be $328,000 + $109,000 = $437,000.

According to straight line depreciation, the annual depreciation is calculated below:

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Equipment total cost Annual depreciation Equipment life $437,000 5 $87,400

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Step 2

Cash outflow at time 0, is calculated below:

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Equipment purchase cost + Installation cost + Inventory investment Cash outlfow $328,000+ $109,000 + $74, 000 =$511,000

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Step 3

When calculating operating gross profit, depreciation is deducted from revenue which will decrease the cash flow. So, it is needed to add b...

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(Annual revenue - Cash operating expenses - Depreciation) Annual operating cash flow = | |x(1-Tax rate) +Depreciation -((S260,000-S83.000-S87.400)x (1-0.40) +S87.400 -(S896,00x0.60)+ $87.400 S53,760+S87,400 =$141,160

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