Question

A firm will make a cash outlay of $125,000 for a piece of equipment. Assume the firm has no other expenses or revenues other than those associated with this project. The firm is going to purchase an additional $7,500 of inventory for production with the new equipment and set up a cash account with a $2,500 balance. The inventory purchase will result in an account payable of $6,500. The firm already paid $3,000 for an engineering study to support the case for making the investment. The firm's tax rate is 40%. What is the net cash outflow at time zeroa. Less than 120,000b. Between 120,000 and 125,000c.Between 125,000 and 130,000d. Greater than 130,000e.Cannot be determined with this information

Answer 1

The correct answer to this question is C,between $125000 and $130000 as the actual net cash flow at time zero is $128500 as shown below.

Step-by-step explanation:

The net cash flow at zero is the equipment capital outlay plus net increase in working capital(capital meant for day to day running of the business)

The net cash flow is computed thus:

Equipment $125000

Net working capital investment

Inventory $7500

plus cash $2500

less account payable ($6500)

$3500

$128,500