2D1B OLSON INDUSTRIES NEEDS TO ADD A SMALL PLANT TO ACCOMMODATE A SPE...
300.
CSO: 2D1b
LOS: 2D1b
Olson Industries needs to add a small plant to accommodate a special contract to supply
building materials over a five year period. The required initial cash outlays at Time 0 are
as follows.
Land
$ 500,000
New building
2,000,000
Equipment
3,000,000
Olson uses straight-line depreciation for tax purposes and will depreciate the building
over 10 years and the equipment over 5 years. Olson’s effective tax rate is 40%.
Revenues from the special contract are estimated at $1.2 million annually and cash
expenses are estimated at $300,000 annually. At the end of the fifth year, the assumed
sales values of the land and building are $800,000 and $500,000, respectively. It is
further assumed the equipment will be removed at a cost of $50,000 and sold for
$300,000.
As Olson utilizes the net present value (NPV) method to analyze investments, the net
cash flow for period 5 would be`
a.
$1,710,000.
b.
$2,070,000.
c.
$2,230,000.
d.
$2,390,000.