A corporation needs to replace an old lathe with a new, more efficient model. Th

ID: 2444534 • Letter: A

Question

A corporation needs to replace an old lathe with a new, more efficient model. The old lathe was purchased for $50,000 nine years ago and has a current book value of $5,000. (The old machine is being depreciated on a straight-line basis over a ten-year useful life.) The new lathe cost $100,000. It will cost the company $10,000 to get the new lathe to the factory and get it installed. The old machine will be sold as scrap metal for $2,000. The new machine is also being depreciated on a straight-line basis over ten years. Sales are expected to increase by $8,000 per year while operating expenses are expected to decrease by $12,000 per year. The corporation's marginal tax rate is 40%. Additional working capital of $3,000 is required to maintain the new machine and higher sales level. The new lathe is expected to be sold for $5,000 at the end of the project's ten-year life. What is the project's terminal cash flow?

Explanation / Answer

The Coca-Cola Company

Income statement

For the year ended December 31, 2008

Net revenues

31,944

Cost of goods sold

11,374

GROSS PROFIT

20,570

Selling, general and administrative

11,774

Other operating charges

350

OPERATING INCOME

8,446

Interest income

333

Interest expense

438

Equity income (loss)

(874)

Other income (loss)

(28)

INCOME BEFORE INCOME TAXES

7,439

Income taxes

1,632

NET INCOME

5,807