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A new product is being considered by Stanton Corp

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A new product is being considered by Stanton Corp. An

outlay of $40,000 is required for equipment and an

additional net working capital investment of $1000 is

required. The project is expected to have a 4 year life

and the equipment will be depreciated on a straight line

basis (equal annual amount) to a $4,000 book value.

 

Producing the new product will reduce current

manufacturing expenses by $5,000 annually and

increase earnings (revenue) before depreciation and

taxes by $6,000 annually.

marginal tax rate is 40 percent. the equipment will have a

market salvage value of $10,000 at the end of 4 years.

 

Assume the project's after-tax operating cash flow during years 1-4 from the machine = $8,000 and the after tax salvage value = $7,000. What is the total cash flow expected from this project in the terminal year, including any initial investment amounts assumed to be recovered? Include all terminal year flows as well as the terminal year operating cash flow of 8,000 assumed.

 

A. 7,000

B. 8,000

C. 15,000

D. 16,000

E. None of the above