5 Exercise 12-28 Identifying Relevant Cash Flows; Asset-Purchase Decision [LO 12-3] 0.55 points 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 ine generates annual cash revenues of approximately $4,800,000 and cash expenses of $3,720,000, one-third of which are labor costs. The current level of Investment In this existing division is $12,650,000. (Sales and costs of this dlvision are not affected by the investment dec'sion regarding the complementary line. Mendoza estimates that Incremental (noncash) net working capital of $38,500 will be needed to support the new usiness ine. No additional faclties-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 $446,000 per year. Raw materials costs assoclated with the new line are expected to be $1,450,000 per year, whille the total labor cost is expected to double. The CFO of the company estimates that new machinery costing $4,000,000 would need to be purchased. This machinery has a five-year useful 'e and an estimated sa vage (terminal) value of $640,000. For tax purposes, assume that the Mendoza Company would use the straight-lne method(wth estimated sa vage value cons dered in the calculation) Assume, further, that the weighted-average cost of capital (VACC) lor Mendoza s16% (after-tax) and that the combined federal and state) income tax rate is 38%. Finally, assume that the new business nne is expected to generate annual cash revenue of $4,200,000 Required: Determine relevant cash flows latter-tax) at each of the following three points. 11) 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 depreclation deductions, further, you can assume that at the end of the project's lfe Mendoza will fully recover ts initial investment in net working cap tal. Complete this question by entering your answers in the tabs below Required Required Required Determine relevant cash flow (after-tax) at project operation. (Do not round intermediate Annual After-tax Cash Inflow (time p Incremental cash revenues 4,200 cash expenses: 446 1,450 Raw materials Depreciation (SL basis) 3,136,000 064,000 Income tax After-tax operating income Add: Noncash charges 1,064,00 Annual after-tax cash inflow 064,000