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Cash flows used to make the capital budgeting decision

1) You have been hired as a financial consultant to Jane Corporation, a large, publicly traded firm. The company is looking at setting up a manufacturing plant overseas. The project will be for five years. The company bought some land three years ago for $4.2 million in anticipation of using it as a possible plant site, but the project was abandoned. The land was appraised last week for $2.0 million. The company wants to build its new manufacturing plant on this land at a cost of $11.9 million ($3.9 million for the building and $8 million for the equipment). Jane Corporation uses straight-line depreciation for the building and will depreciate the plant over 39 years to a zero salvage value. Jane Corporation uses the MACRS 3 years equipment schedule for the equipment; applicable percentages are 33%, 45%, 15% and 7%. At the end of the project (i.e., the end of 5 years), Jane Corporation best estimate is that the plant (including the land) can be sold to the foreign government for $ 6 million. The company expects annual pretax operating income ( after operating expenses but before depreciation and taxes) to be $3,250,000. The tax rate is 40%.What is the initial, annual operating and terminal cash flows that will be used to make the capital budgeting decision? Please prepare a table ( in excel) to show the project cash flows.

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1) You have been hired as a financial consultant to Jane Corporation, a large, publicly traded firm. The company is looking at setting up a manufacturing plant overseas. The project will be for five years. The company bought some land three years ago for $4.2 million in anticipation of using it as a possible plant site, but the project was ...

Solution Summary

This provides the steps to calculate the initial, annual operating and terminal cash flows that will be used to make the capital budgeting decision

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