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problem: You are analyzing the buy of new equipment. Since you are not an expert on this type of equipment, you hire a consulting firm to make recommendations. The consultant charged you dollar 2,500 and recommended the purchase of the latest model from Equipment Corp. of America.  The equipment costs dollar 60,000, and it will cost another dollar 12,000 to modify it for special use by your firm.  The equipment will be depreciated on a straight-line basis over six years with no salvage value.  You expect the equipment will be sold after three years for dollar 18,000.  Use of the equipment will require an increase in your company's net working capital of dollar 3,000, but this dollar 3,000 will be recovered at the end of year three.  The use of the equipment will have no effect on revenues, but it is expected to save the firm dollar 30,000 per year in before-tax operating costs.  Your company's marginal tax rate is 40 percent. Determine the incremental free cash flow for the first year of the project?

[A]       $28,400

[B]       $30,880

[C]       $22,800

[D]       $24,750

Basic Finance, Finance

  • Category:- Basic Finance
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