Question

Production facilities for the lite orange juice product would be set up in an unused section of Indian River's main plant. Although no one has expressed an interest in this portion of the plant, management wants to know how the analysis could incorporate the interest of another citrus in leasing the lite orange juice production site for $25,000 a year. Relatively inexpensive, used machinery with an estimated cost of only $500,000 would be purchased, but shipping costs to move the machinery to Indian River's plant would total $20,000, and installation charges would add another $50,000 to the total equipment cost. Further, Indian River's inventories (raw materials, work-in-process, and finished goods) would have to be increased by $10,000 at the time of the initial investment. The machinery has a remaining economic life of four years, and the company has obtained a special tax ruling that allows it to depreciate the equipment under the MACRS 3-year class. Under current tax law, the depreciation allowances are 0.33, 0.45, 0.15, and 0.07 in Years 1 through 4, respectively. The machinery is expected to have a salvage value of $100,000 after four years of use.

Answer 1

Machinery cost	600000
Shipping costs	20000
Installation	50000
Total equipment costs	670000
Change in working capital	10000

	Rate	Calculation	Value
Depreciation	670000
Year 1	0.33	=670000*0.33	221100
Year 2	0.45	=670000*0.45	301500
Year 3	0.15	=670000*0.15	100500
Year 4	0.07	=670000*0.07	46900

Unit pice	3	3	3	3
unit sales	425000	425000	425000	425000
revenues	1275000	1275000	1275000	1275000
operating costs	637500	637500	637500	637500
depreciation	221100	301500	100500	46900
other project effects	20000	20000	20000	20000
before tax income	396400	316000	517000	570600
taxes 40%	158560	126400	206800	228240
Net income	237840	189600	310200	342360
Plus depreciation	221100	301500	100500	46900
Net Operating cash flow	458940	491100	410700	389260
Salvage value				100000
SV tax (40%)				40000

All revenues and other costs are constant

Net investment outlay	= price + freight +installation +Changes in netwroking capital
	=600000+20000+50000+10000
Initial cost at year 0	680000

Project net cashflow in year 4	=Salvage value - SV tax +recovery of net working capital +net operating cash flow
	=100000-40000+10000+389260
	459260