2D1B SKYTOP INDUSTRIES IS ANALYZING A CAPITAL INVESTMENT PROJECT USIN...

295.

CSO: 2D1b

LOS: 2D1b

Skytop Industries is analyzing a capital investment project using discounted cash flow

(DCF) analysis. The new equipment will cost $250,000. Installation and transportation

costs aggregating $25,000 will be capitalized. Existing equipment will be sold

immediately after installation of the new equipment. The existing equipment has a tax

basis of $100,000 and an estimated market value of $80,000. Skytop estimates that the

new equipment’s capacity will generate additional receivables and inventory of $30,000,

while payables will increase by $15,000. Annual incremental pre-tax cash inflows are

estimated at $75,000. Skytop’s effective income tax rate is 40%. Total after-tax cash

outflows occurring in Year 0 would be

a.

$177,000.

b.

$182,000.

c.

$198,000.

d.

$202,000.