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Question
The Smith Corporation is a maker of fine stereo components and presently has finished goods inventories of $800,000. They need a short-term bank loan of $400,000 for three months. The bank has proposed two different financing arrangements. The first is a floating lien arrangement at a rate of 22 percent. The second proposal is for a terminal warehouse arrangement at 11 percent. Under the latter proposal, Smith will pay $1,000 a month plus round trip shipping expense of $6,000. Which source of credit should be selected by the Smith Corporation? Explain.Answer
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Related questions
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B) The $4,000 may be expensed each year over the life of the project as part of the incremental free cash flows.
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Your company is considering the replacement of an old delivery van with a new one that is more efficient. The old van cost $40,000 when it was purchased 5 years ago. The old van is being depreciated using the simplified straight-line method over a useful life of 8 years. The old van could be sold today for $7,000. The new van has an invoice price of $80,000, and it will cost $6,000 to modify the van to carry the company's products. Cost savings from use of the new van are expected to be $28,000 per year for 5 years, at which time the van will be sold for its estimated salvage value of $18,000. The new van will be depreciated using the simplified straight-line method over its 5-year useful life. The company's tax rate is 35%. Working capital is expected to increase by $5,000 at the inception of the project, but this amount will be recaptured at the end of year five. What is the incremental free cash flow for year one?
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C) $22,305
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Q:
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A) $80,000
B) $84,000
C) $90,000
D) $94,000