Roten Manufacturing Company is considering an investment on a machine for producing auto parts. The machine costs $250,000 today, will have a five-year life and will be depreciated over a five-year life on a straight-line basis toward a zero salvage value. The company paid a consulting company $7,000 last year to help them decide whether there is a sufficient demand for the auto parts. In addition to the investment on the machine, the company also invests $15,000 in net working capital. The company has estimated the performance of the new machine and believes the following are good estimates of the new asset: sales $140,000 per year, cost of goods sold (35% of sales) per year, and administrative expenses $15,000 per year. The company pays interest $20,000 annually on average, has a 10% cost of capital and a 30% tax rate. Answer Questions 1 - 8.
1. Should Roten include consulting fee, $7,000, in estimating project's cash flows?
a. Yes
b. No
2. What is the project cash flow at Year 0?
a. -$203,000
b. -$250,000
c. -$15,000
d. -$265,000
3. What is the project cash flow at Year 5?
a. $68,200
b. $83,200
c. $74,000
d. $50,500
4. What is payback period for the project?
a. 4.51 years
b. 3.78 years
c. 4.02 years
d. 3.89 years