Incremental costs - Initial and terminal cash flow
Consider the case of Marston Manufacturing
Acme Manufacturing is considering a project that requires an investment in new equipment of $3,200,000, with an additional $160,000 in shipping and installation costs. Acme estimates that its accounts receivable and inventories need to increase by $640,000 to support the new project, some of which is financed by a $256,000 increase in spontaneous liabilities (accounts payable and accruals).
The total cost of Marston's new equipment is___the and consists of the price of the new equipment plus the_____.
In contrast, Marston's initial net investment outlay is____.
Suppose Marston's new equipment is expected to sell for $200,000 at the end of its four-year useful life, and at the same time, the firm expects to recover all of its net operating working capital investment. The company chose to use straight-line depreciation, and the new equipment was fully depreciated by the end of its useful life. If the firm's tax rate is 40%, what is the project's total ter)tination cash flow?
a. $200,000.
b. $464,000.
c. $504,000.
d. $120,000.