17 October, 14:46

# 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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1. 17 October, 15:02
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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