The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now, and the useful life of the project is ten years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the ten-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in ten years. Finney's discount rate is 16%. (Ignore income taxes in this problem.)
-What would the annual net cash inflows from this project have to be in order to justify investing in remodelling?
A) $14,495.
B) $16,147.
C) $29,158.
D) $35,842.

Question

Quizplus · Accepted Answer

The annual net cash inflows must be sufficient to cover the initial investment, including working capital, and provide a return at the discount rate of 16%. The present value of the cash inflows over ten years, plus the salvage value and the return of working capital, must equal the initial investment of $150,000 ($120,000 + $30,000). The correct calculation results in an annual cash inflow of $29,158.

The Finney Company Is Reviewing the Possibility of Remodelling One