A lodging property wishes to change its lighting system with the most efficient ones. The old system will be sold in the market and the new system will cost $500,000. The new investment does not require an additional outlay but it needs incremental working capital of $48,000. The old lighting system can be sold for $200,000 in the market which is an equivalent of its books value. Moreover, the new investment will not have incremental sales revenue but it will have incremental operating costs of $22,000, and incremental depreciation of $11,000 for the first year. There is no expected change in net working capital after the project is undertaken and no estimated salvage value for the first year. For the second year, suppose that there is 12.00% increase in operating costs and depreciation. At the end of the second year, the estimated salvage value is $10,000 on the new lighting system. What are the net investment and net cash flow for the first and second year for this investment (assume that the applied tax rate is 40.00% for this firm)?

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
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A lodging property wishes to change its lighting system with the most efficient ones. The old system will be sold in the market and the new system will cost $500,000. The new investment does not require an additional outlay but it needs incremental working capital of $48,000. The old lighting system can be sold for $200,000 in the market which is an equivalent of its books value.


Moreover, the new investment will not have incremental sales revenue but it will have incremental operating costs of $22,000, and incremental depreciation of $11,000 for the first year. There is no expected change in net working capital after the project is undertaken and no estimated salvage value for the first year. For the second year, suppose that there is 12.00% increase in operating costs and depreciation. At the end of the second year, the estimated salvage value is $10,000 on the new lighting system. What are the net investment and net cash flow for the first and second year for this investment (assume that the applied tax rate is 40.00% for this firm)?

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