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| Kell Inc. is analyzing an investment for a new product expected to have annual sales of 100,000 units for the next 5 years and then be discontinued. New equipment will be purchased for $1,200,000 and cost $300,000 to install. The equipment will be depreciated on a straight-line basis over 5 years for financial reporting purposes and 3 years for tax purposes. At the end of the fifth year, it will cost $100,000 to remove the equipment, which can be sold for $300,000. Additional working capital of $400,000 will be required immediately and needed for the life of the product. The product will sell for $80, with direct labor and material costs of $65 per unit. Annual indirect costs will increase by $500,000. Kell’s effective tax rate is 40%. In a capital budgeting analysis, what is the expected cash flow at time = 5 (fifth year of operations) that Kell should use to compute the net present value? A. $1,240,000. B. $1,120,000. C. $720,000. D. $800,000. |