Assume the following:
1. You buy some equipment today for $100 to produce and sell balloons. you invest $25 in working capital today to support your sales efforts. The business produces after tax cash flow of $30 per year for 5 years. All cash flows occur on the last day of the year. You close the business at the end of 5 years and sell the equipment for $50 (it had been depreciated to $20; your tax rate is 33.33%) You liquidate the working capital at the end of the first year as well. Assume a 10% discount rate Is this a good project? What is the present value of all of the combined cash flows?
A) No. negative $10
B) Yes. $25
C) yes. $14
D) yes. $29
E) Yes. $35
2. A capital expenditure is anything defined by management as significant while an operating expense is deemed to be more minor.
True
False