An infinite-life replacement chain allows projects of different lengths to be compared.
Indicate whether the statement is true or false
Question 2
Kelly Corporation is considering an investment proposal that requires an initial investment of 150,000 in
equipment. Fully depreciated existing equipment may be disposed of for 40,000 pre-tax.
The proposed project
will have a five-year life, and is expected to produce additional revenue of 65,000 per year. Expenses other
than depreciation will be 15,000 per year. The new equipment will be depreciated to zero over the five-year
useful life, but it is expected to actually be sold for 20,000. Kelly has a 35 tax rate.
a. What is the net initial outlay for the proposed project?
b. What is the operating cash flow for years 1-4?
c. What is the total cash flow at the end of year five (operating cash flow for year 5 plus terminal cash flow)?
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