Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

1 This exercise parallels the machine-purchase decision for the Mendoza Company that is discussed in the body of the chapter. Assume that Mendoza is exploring

image text in transcribed
image text in transcribed
image text in transcribed
image text in transcribed
1 This exercise parallels the machine-purchase decision for the Mendoza Company that is discussed in the body of the chapter. Assume that Mendoza is exploring whether to enter a complementary line of business. The existing business line generates annual cash revenues of approximately $5,400,000 and cash expenses of $3,720,000, one-third of which are labor costs. The current level of investment in this existing division is $12,200,000. (Sales and costs of this division are not affected by the investment decision regarding the complementary line.) Book Mendoza estimates that incremental (noncash) net working capital of $38,000 will be needed to support the new business line. No additional facilities-level costs would be needed to support the new line-there is currently sufficient excess capacity. However, the new line would require additional cash expenses (overhead costs) of $440,000 per year. Raw materials costs associated with the new line are expected to be $1,400,000 per year, while the total labor cost is expected to double. Ask int rences The CFO of the company estimates that new machinery costing $3,500,000 would need to be purchased. This machinery has a seven-year useful life and an estimated salvage (terminal) value of $560,000. For tax purposes, assume that the Mendoza Company would use the straight-line method (with estimated salvage value considered in the calculation). Assume, further, that the weighted-average cost of capital (WACC) for Mendoza is 15% (after-tax) and that the combined (federal and state) income tax rate is 36%. Finally, assume that the new business line is expected to generate annual cash revenue of $4,000,000. Required: Determine relevant cash flows (after-tax) at each of the following three points: (1) project initiation, (2) project operation, and (3) project disposal (termination). For purposes of this last calculation, you can assume that the asset is sold at the end of its useful life for the salvage value used to establish the annual straight-line depreciation deductions; further, you can assume that at the end of the project's life Mendoza will fully recover its initial investment in net working capital. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 salvage value used to establish the annual straight-line depreciation deductions; further, you ca project's life Mendoza will fully recover its initial investment in net working capital. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Determine relevant cash flow (after-tax) at project initiation. After-tax cash flow at project initiation (ie.. time period 0) Requited Required 2 > es Required 1. Required 2 Required 3 Determine relevant cash flow (after-tax) at project operation. (Do not round intermediate calculation Annual After-tax Cash Inflow (time periods 1 through 7): Incremental cash revenues Incremental cash expenses: Incremental non-cash expenses: Incremental operating income After-tax operating income Annual after-tax cash inflow Required 3 >

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Entrepreneurial Finance

Authors: Steven Rogers

4th Edition

1260461440, 978-1260461442

More Books

Students also viewed these Finance questions

Question

Explain the relationship between elements and atoms.

Answered: 1 week ago

Question

4. Identify the supernatural aid in The Wizard of Oz.

Answered: 1 week ago

Question

1. Does your voice project confidence? Authority?

Answered: 1 week ago