Suppose Blue Thumb Tools is considering the introduction of a new, heavier hammer to be used...

Free

80.2K

Verified Solution

Question

Finance

Suppose Blue Thumb Tools is considering the introduction of anew, heavier hammer to be used for driving spikes. The new hammerwill cost $490,000. The cost will be depreciated straight-line tozero over the project’s five-year life, at the end of which the newhammer can be scrapped for $40,000. The new hammer will save thefirm $146,000 per year in pretax operatingcosts, and it required an initial investment in networking capital of $35,000. The tax rate of the firm is 30%. Whatare the cash flows of firm’s new project (using a time line)?

Answer & Explanation Solved by verified expert

3.7 Ratings (656 Votes)

Time line		0	1	2	3	4	5



Cost of new machine		-490000
Initial working capital		-35000
=Initial Investment outlay		-525000



Savings			146000	146000	146000	146000	146000


-Depreciation	Cost of equipment/no. of years		-98000	-98000	-98000	-98000	-98000

=Pretax cash flows			48000	48000	48000	48000	48000
-taxes	=(Pretax cash flows)*(1-tax)		33600	33600	33600	33600	33600
+Depreciation			98000	98000	98000	98000	98000
=after tax operating cash flow			131600	131600	131600	131600	131600

reversal of working capital							35000

+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)						28000
+Tax shield on salvage book value	=Salvage value * tax rate						0
=Terminal year after tax cash flows							63000

Total Cash flow for the period		-525000	131600	131600	131600	131600	194600

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Suppose Blue Thumb Tools is considering the introduction of anew, heavier hammer to be used for driving spikes. The new hammerwill cost $490,000. The cost will be depreciated straight-line tozero over the project’s five-year life, at the end of which the newhammer can be scrapped for $40,000. The new hammer will save thefirm $146,000 per year in pretax operatingcosts, and it required an initial investment in networking capital of $35,000. The tax rate of the firm is 30%. Whatare the cash flows of firm’s new project (using a time line)?