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A firm is considering a line of contact lens production. The new production line will cost $210,000 Net working capital is expected to increase by $40,000. The new line will be depreciated over its 7 year life using straight line depreciation (assume no salvage value for this calculation). Revenues are expected to increase $80,000 the first year and increase at a rate of $8000 a year thereafter (i.e. yr 1 =80,000; yr 2 = 88,000). Operating costs are expected to jump $50,000 in the first year and increase at a rate of $5000 per year thereafter. After seven years it is estimated that the machine will have a salvage value of $25,000. The firm has a marginal tax rate of 40%.

What are the net initial investment (CF0), annual cash flows, and the terminal value?

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  • Reference No.:- M939152

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