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? (Do not round your intermediate calculations and round your final answer to the nearest whole number.)
A) $14,495.
B) $16,147.
C) $29,159.
D) $35,842.

Question

Quizplus · Accepted Answer

The annual net cash inflows can be calculated using the formula: 
Annual Net Cash Inflows = Annual Cash Inflows - Annual Cash Outflows 
Annual Cash Inflows are given as $70,000 and Annual Cash Outflows are given as:
Labor costs ($18,000) + Materials costs ($25,000) + Change in net working capital ($2,000) + Annual Depreciation ($15,000) = $60,000 
So, the Annual Net Cash Inflows would be $10,000 ($70,000 - $60,000). 
To justify investing in remodeling, the Annual Net Cash Inflows would need to be greater than or equal to the initial investment of $90,000, divided by the required rate of return of 30%. So: 
$90,000 / 30% = $300,000 
Therefore, the annual net cash inflows from this project would have to be at least $300,000 to justify investing in remodeling. 
Since the calculated annual net cash inflows are only $10,000, the investment is not justified. Thus, option C is the best choice.

The Finney Company Is Reviewing the Possibility of Remodelling One