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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George Kaplan is considering adding a new crop-dusting plane to his fleet at North Corn Corner, Inc....
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