Financial Management: Core Concepts, Third Edition

10.3 Capital Spending and Depreciation

Continuing with our project of a flavored cola for Cogswell Cola, we need to examine the required cash flow to purchase new production equipment. For this project, the company will purchase a cola-syrup mixing system that will cost $2,000,000 and a water filtering machine that will cost $1,500,000. The company will need to purchase and install both machines prior to production; therefore, the cash outflow will occur at the start of the project. Let’s assume that the installation cost of each machine is 10% of the value of the machine that Cogswell Cola purchased. Therefore, the company spends a total of $3,850,000 ($2,000,000 + $200,000 + $1,500,000 + $150,000) before it fills the first bottle with Pulsar ...