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Instruction 19.1: Use the Information for Following Question(s)

question 2

Multiple Choice

Instruction 19.1:
Use the information for following question(s) .
The Wheel Deal Inc., a company that produces scooters and other wheeled non-motorized recreational equipment is considering an expansion of their product line to Europe. The expansion would require a purchase of equipment with a price of euro 1,200,000 and additional installation of euro 300,000 (assume that the installation costs cannot be expensed, but rather, must be depreciated over the life of the asset) . Because this would be a new product, they will not be replacing existing equipment. The new product line is expected to increase revenues by euro 600,000 per year over current levels for the next 5 years, however; expenses will also increase by euro 200,000 per year. (Note: Assume the after-tax operating cash flows in years 1-5 are equal, and that the terminal value of the project in year 5 may change total after-tax cash flows for that year.) The equipment is multipurpose and the firm anticipates that they will sell it at the end of the five years for euro 500,000. The firm's required rate of return is 12% and they are in the 40% tax bracket. Depreciation is straight-line to a value of euro 0 over the 5-year life of the equipment, and the initial investment (at year 0) also requires an increase in NWC of euro 100,000 (to be recovered at the sale of the equipment at the end of five years) . The current spot rate is $0.95/euro , and the expected inflation rate in the U.S. is 4% per year and 3% per year in Europe.
-Refer to Instruction 19.1. What are the annual after-tax cash flows for the Wheel Deal project?

Definitions:

Incumbent Firms

Established companies that currently dominate a sector or industry.

New Firms

Newly established business entities that often bring innovation, competition, and dynamism to their respective markets.

Long-Run Equilibrium

A state in which all factors of production and prices adjust fully to economic changes, with all markets clearing and no external pressures affecting supply and demand.

Efficient Scale

The quantity of output that minimizes average total cost.