Name: 5. Foley Systems is considering a new investment whose data are shown below. Capital expenditures would include the purchase of $72,000 of new equipment costing an additional $3,000 to deliver and install. The equipment would be depreciated on a straight-line basis over the project’s 2-year life and can be sold for $30,000 (before taxes) at the end of year 2. Revenues and other operating costs are expected to be constant at $81,000 and $42,000, respectively, over the project’s life.
Net investment in fixed assets $72,000
Delivery and installation costs $3,000
Pre-tax salvage value of equipment $30,000
Straight-line depreciation rate 50%
Annual sales revenues $81,000
Annual operating costs (excl. depreciation) $42,000
Tax rate 35.0%
a. What is the operating cash flow for the project?
b. What is the project’s NPV? Should it be accepted?
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