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gizmo_the_mogwai [7]
2 years ago
9

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?
Business
1 answer:
Yuri [45]2 years ago
7 0

Answer:

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

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