2D1B OLSON INDUSTRIES NEEDS TO ADD A SMALL PLANT TO ACCOMMODATE A SPE...

289.

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 3 would be

a.

$60,000.

b.

$860,000.

c.

$880,000.

d.

$940,000.