Deriving cash flows for abandonment decision. The Little Folks Company must decide whether to continue selling a line of children's shoes manufactured on a machine that has no other purpose. The machine has a current book value of $12,000 and Little Folks can sell it today for $8,000. Little Folks depreciates the machine on a straight-line basis for tax purposes assuming no salvage value and could continue to use it for 4 more years. If Little Folks keeps the machine in use, it can sell it at the end of 4 years for $800, although this will not affect the depreciation charge for the next 4 years. The variable cost of producing a pair of shoes on the machine is less than the cash received from customers by $15,000 per year. To produce and sell the children's shoes requires cash outlays of $10,000 per year for administrative and overhead expenditures as well. Little Folks Company pays taxes at a rate of 40 percent. The rate applies to any gain or loss on disposal of the machine as well as to other income. From its other activities. Little Folks Company earns more income than any losses from the line of children's shoes or from disposal of the machine.

a. Prepare a schedule showing all the cash and cost flows that Little Folks Company needs to consider in order to decide whether to keep the machine.

b. Should Little Folks Company keep the machine if its cost of capital is 12 percent?

c. Repeat part

b. assuming a cost of capital of 20 percent.