only do part B and please show work 3. Copper Mountain Chemical Inc, is consider
ID: 2782436 • Letter: O
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only do part B and please show work
3. Copper Mountain Chemical Inc, is considering updating its production process. The managers are considering replacing a machine which it purchased four years ago with an installed cost of $625,000. There are 2 years of depreciation remaining using the MACRS rates given below. The new machine, a RIOCAR 1000, will cost $920,000 and will require an additional $30,000 for delivery and installation. This new unit will also require training costs approximately $8,000. The MACRS rates are 20%, 32%, 19%, 12%, l 1%, and 6% for years 1 through 6 respectively, and the marginal tax rate is 34%. The old machine is exp for approximately $250,000 today or $30,000 ten years from now. ected to be sold If CMC purchases the new equipment 0 per year, t, annual revenues are expected to increase by about $50,00 equipment to $ expenses are expected to be an additional $3,000 less per year. , however, the expenses are expected to decrease from $40,000 with the old 30,000 with the new machine in the first year. Beyond that, the company's Since the new machine is to be more efficient, net operating working capital (mainly due to required inventory) is expected to fall by $5,000 at the outset of the project and remain at that new level through the duration of the project. a) (7 points) Calculate the year 0 cash flow which would be used for capital budgeting purposes. b) (8 points) Calculate the year 1 net cash flow which would be used for capital budgeting purposes. N(CFExplanation / Answer
b. Net cash flow for year 1 to be used for capital budgeting : $ 82,805
Incremental depreciation in Year 1 = Installed cost of the equipment x ( 1st year depreciation rate ) - Cost of Oldd equipment x ( 5th year depreciation rate) = $ 950,000 x 20 % - $ 625,000 x 11 % = $ 190,000 - $ 68,750 = $ 121,250.
Annual incremental cash flows = Increase in Revenues + Decrease in Expenses = $ 50,000 + $ 10,000 + $ 3,000 = $ 63,000.
Operating cash flows after tax for Year 1 : Annual incremental cash flows x ( 1 - T ) + Annual incremental depreciation x T = $ 63,000 x 0.66 + $ 121,250 x 0.34 = $ 41,580 + $ 41,225 = $ 82,805.
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