1. Net cash outflow, project initiation (time period 0) | ||||||||||
Cost of new machine | $3,750,000 | |||||||||
Incremental w/cap required | $40,000 | |||||||||
Total | $3,790,000 | |||||||||
2. Annual after-tax cash inflow (time periods 1 through 6): | ||||||||||
Incremental cash revenues | $4,100,000 | |||||||||
Incremental cash expenses: | ||||||||||
Overhead | $450,000 | |||||||||
Raw materials | $1,450,000 | |||||||||
Labor | $1,450,000 | |||||||||
Incremental non-cash expenses: | ||||||||||
Depreciation (SL basis) | $525,000 | $3,875,000 | ||||||||
Incremental operating income | $225,000 | |||||||||
Less: Income tax (@40%) | $101,250 | |||||||||
After-tax operating income | $123,750 | |||||||||
Plus: Noncash charges (depreciation) | $525,000 | |||||||||
Annual after-tax cash inflow | $648,750 | |||||||||
3. Project termination (end of year 6): | ||||||||||
Recovery of incremental investment in net working cap | $40,000 | |||||||||
Salvage value of machine: | ||||||||||
Estimated terminal value | $600,000 | |||||||||
Tax Effect (@40%) | $0 | $600,000 | ||||||||
$640,000 |
Check my work This exercise parallels the machine-purchase decision for the Mendoza Company that is discussed...
Check my work This exercise parallels the machine-purchase decision for the Mendoza Company that is discussed in the body of the chapter. Assume that Mendoza is exploring whether to enter a complementary line of business. The existing business line generates annual cash revenues of approximately $5,400,000 and cash expenses of $3,780,000, one-third of which are labor costs. The current level of investment in this existing division is $12,450,000. (Sales and costs of this division are not affected by the investment...
Check my work This exercise parallels the machine-purchase decision for the Mendoza Company that is discussed in the body of the chapter. Assume that Mendoza is exploring whether to enter a complementary line of business. The existing business line generates annual cash revenues of approximately $5,400,000 and cash expenses of $3,780,000, one-third of which are labor costs. The current level of investment in this existing division is $12,450,000. (Sales and costs of this division are not affected by the investment...
This exercise parallels the machine-purchase decision for the Mendoza Company that is discussed in the body of the chapter. Assume that Mendoza is exploring whether to enter a complementary line of business. The existing business line generates annual cash revenues of approximately $5,250,000 and cash expenses of $3,765,000, one-third of which are labor costs. The current level of investment in this existing division is $12,500,000. (Sales and costs of this division are not affected by the investment decision regarding the...
This exercise parallels the machine-purchase decision for the Mendoza Company that is discussed in the body of the chapter. Assume that Mendoza is exploring whether to enter a complementary line of business. The existing business line generates annual cash revenues of approximately $5,700,000 and cash expenses of $3,810,000, one-third of which are labor costs. The current level of investment in this existing division is $12,350,000. (Sales and costs of this division are not affected by the investment decision regarding the...
This exercise parallels the machine-purchase decision for the Mendoza Company that is discussed in the body of the chapter. Assume that Mendoza is exploring whether to enter a complementary line of business. The existing business line generates annual cash revenues of approximately $4,950,000 and cash expenses of $3,735,000, one-third of which are labor costs. The current level of investment in this existing division is $12,600,000. (Sales and costs of this division are not affected by the investment decision regarding the...
Assume that it is January 1, 2019, and that the Mendoza Company is considering the replacement of a machine that has been used for the past 3 years in a special project for the company. This project is expected to continue for an additional 5 years (i.e., until the end of 2023). Mendoza will either keep the existing machine for another 5 years (8 years total) or replace the existing machine now with a new model that has a 5-year...
The Guo Chemical Corporation is considering the purchase of a chemical analysis machine. The purchase of this machine will result in an increase in earnings before interest and taxes of $65,000 per year. The machine has a purchase price of $350,000,and it would cost an additional $9,000 after tax to install this machine correctly. In addition, to operate this machine properly, inventory must be increased by $14,000. This machine has an expected life of 10 years, after which time it...
Raymobile Motors is considering the purchase of a new production machine for $500,000. The purchase of this machine will result in an increase in earnings before interest and taxes of $150,000 per year. To operate this machine properly, workers would have to go through a brief training session that would cost $25,000 after tax. In addition, it would cost $5,000 after tax to install this machine correctly. Also, because this machine is extremely efficient, its purchase would necessitate an increase...
Raymobile Motors is considering the purchase of a new production machine for 350,000. The purchase of this machine will result in an increase in earnings before interest and taxes of $120,000 per year. To operate this machine properly, workers would have to go through a brief training session that would cost $27,000 after tax. In addition, it would cost $4,000 after tax to install this machine correctly. Also, because this machine is extremely efficient, its purchase would necessitate an...
Check my work Rockyford Company must replace some machinery that has zero book value and a current market value of $1,400. One possibility is to invest in new machinery costing $36,000. This new machinery would produce estimated annual pretax cash operating savings of $14,400. Assume the new machine will have a useful life of 4 years and depreciation of $9,000 each year for book and tax purposes. It will have no salvage value at the end of 4 years. The...