Question

George is currently considering the replacement of an old grinder in his workshop. The old grinder was purchased 3 vears ago for $40,000. It is being depreciated using the prime (straight line) depreciation method. Its life is 5 years with no salvage value at the end of the 5th year. A trader has offered George S25,000 for the old grinder. The new grinder which George would like to purchase costs $70,000. The installation cost is $5,000. This grinder would also be depreciated over 5 years using the prime method. However, at the end of the 5th year, its expected sales value is $5,000. The new grinder requires an increase of $7,550 in net working capital. Tax rate is 30%. Annual revenue and expenses before depreciation, interest and tax are estimated below: PERIOD NEW GRINDER OLD GRINDEFR Revenue 500,000 500,000 500,000 500,000 500,000 Revenue Year1550,000 Year 2575,000 Year 3600,000 Year 4625,000 Year 5625,000 Expenses 490,000 505,000 525,000 545,000 545,000 Expenses 445,000 445,000 445,000 445,000 445,000 1) Calculate the initial investment associated with the new grinder. 2) Calculate the relevant (incremental) operating net cash flows. Explain why interest should not be included as a project cost. 3) Calculate the terminal cash flows 4) Prepare a table with all the incremental cash flows of the project.

Answer 1