Rod His Doors

Question

Rod & His Doors

  • We hire Rod for 3 years for 2k/year
  • Accounts Receivable falls by 20K while Rob is employed
  • MARR = 10%
  • Combined Tax Rate = 40%

Should We Hire Rod? Show work through Income and Cash Flow Statement

Answer

Income Statement

2008 2009 2010
Operating Rev. - - —-
Operating Exp. 2,000 2,000 2,000
Taxable Income -2,000 -2,000 -2,000
tax (40%) -800 -800 -800
Net Income -1,200 -1,200 -1,200

Cash Flows

Operations
Net Income -1,200 -1,200 -1,200
Investment
Working Capital 20,000 0 0
Net Cash Flow 18,800 -1,200 -1,200
(1)
\begin{equation} Present Worth=18,800+(-1,200/1.1)+(-1,200/1.1^2)+(-20,000/1.1^3)=$16,906.68 \end{equation}

Positive PW indicates we should hire Rod

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