George Kaplan is considering adding a new crop-dusting plane to his fleet at North Corn Corner, Inc. The new plane will cost $85,000. He anticipates spending an additional $20,000 immediately after the purchase to modify it for crop-dusting. Kaplan plans to use the plane for five years and then sell it. He estimates that the salvage value will be $20,000. With the addition of the new plane, Kaplan estimates revenue in the first year will increase by 10 percent over last year. Revenue last year was $125,000. Other first-year expenses are also expected to increase. Operating expenses will increase by $20,000, and depreciation expense will increase by $10,500. Kaplan's marginal tax rate is 40 percent. For capital budgeting purposes, what is the net cost of the plane? Or, stated another way, what is the initial net cash flow?

Question

Business

Kaleb Hampton

17 April, 04:28

George Kaplan is considering adding a new crop-dusting plane to his fleet at North Corn Corner, Inc. The new plane will cost $85,000. He anticipates spending an additional $20,000 immediately after the purchase to modify it for crop-dusting. Kaplan plans to use the plane for five years and then sell it. He estimates that the salvage value will be $20,000. With the addition of the new plane, Kaplan estimates revenue in the first year will increase by 10 percent over last year. Revenue last year was $125,000. Other first-year expenses are also expected to increase. Operating expenses will increase by $20,000, and depreciation expense will increase by $10,500. Kaplan's marginal tax rate is 40 percent. For capital budgeting purposes, what is the net cost of the plane? Or, stated another way, what is the initial net cash flow?

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Answers (1)

Know the Answer?

Valery Mitchell · Answer 1

The correct answer is $105,000.

Explanation:

According to the scenario, the given data are as follows:

Cost of the plane = $85,000

Modification cost = $20,000

So, we can calculate the net cost of the plane by using following formula:

Net cost of the Plane = Cost of the plane + Modification cost

By putting the value, we get

Net cost of the plane = $85,000 + $20,000

= $105,000