52.Refer to Figures 3,4, 5, 6, and 7 below.Calculate the initial cash flow and the terminal cash flow for NSU Inc's replacement project. NOTE:the operating cash flows are given below. You do NOT need to calculate the operating cash flows.

Operating CF (t=1-5) 1 2 3 4 5

Change in revenue +27500 +27500 +27500 +27500 +27500

Change in expenses -12000 -12000 -12000 -12000 -12000

Old depreciation +10000 +10000 +10000 +10000 +10000

New depreciation -40000 -64000 -38000 -24000 -22000

Change in deprec -30000 -54000 -28000 -14000 -12000

Change in EBT -14500 -38500 -12500 +1500 +3500

Change in tax +5800 +15400 +5000 -600 -1400

Change in EAT -8700 -23100 -7500 +900 +2100

undo" deprec +30000 +54000 +28000 +14000 +12000

Net CF +21300 +30900 +20500 +14900 +14100

Figure 3. NSU, Inc. Capital Budgeting Project

NSU, Inc. is a publisher of textbooks with a 40% effective tax rate.

The company is considering replacing an older manual printing press with a newer, computerized one. The old machine was purchased 10 years ago and had a total useful life of fifteen years.It originally cost $150,000 and was being depreciated by the simplified straight-line method at a rate of $10,000 per year. Since the old machine uses such outmoded technology, it can be sold today for only $35,000.The old machine required two operators who each earned $25,000 per year (salary expense). The old machine required $7,500 in maintenance expense each year. It produced a total of $10,000 per year of defective textbooks that could not be sold (defective product expense).

The new machine being considered will cost $195,000 and will require $1,000 shipping and $500 installation fees. In addition, NSU, Inc. anticipates spending $3500 to modify the new machine for their special conditions. The new machine has a 5-year useful life and will be depreciated using MACRS with a 5-year investment class. At the end of five years of use, the new machine is expected to be sold for $65,000.The new machine requires only one operator who will earn $35,000 per year (salary expense). The new machine will require $7,500 in maintenance expense each year. The new machine will produce $12,000 per year of defective textbooks (defective product expense).

Since the new machine will operate so much faster than the old one, an additional $12,000 will be invested in inventory (net working capital). Also, an increase in sales revenue of $27,500 per year is expected.

Figure 4. NSU Inc. Balance Sheet (in thousands of dollars)

Cash 20 Accounts payable12

Accounts receivable12 Notes payable 7

Inventories 8 Long-term debt (bonds)21

Gross fixed assets 300 Preferred stock 0

Accum deprec 140 Common stock 75

Total assets200 Paid-in capital 50

Retained earnings35

Total liab & equity200

Figure 5. NSU, Inc. Capital

NSU, Inc. common stock is currently selling for a price of $105 per share.Dividends are paid semiannually and are expected to grow at a rate of 5% per year into the foreseeable future.The upcoming dividend is expected to be D₁ = $5.00 per share.

NSU, Inc. can sell new corporate bonds with the following characteristics:

Par value $1,000

Coupon rate 8% per year

Payment schedule semiannual

Maturity 18 years.

These bonds have a current market price of $800 per bond.

Figure 6. MACRS Depreciation Schedule

Ownership Class of Investment

Year 3-year 5-year 7-year 10-year

1 33% 20%14% 10%

245 3225 18

315 19 17 14

47 12 13 12

511 9 9

66 9 7

79 7

84 7

9 7

10 6

11 3

Figure 7. Capital Budgeting cash flow templates

Expansion Project

Initial Cash Flow (t=0) Operating Cash Flows (t=1... n) Terminal Cash Flow(t=n)

purchase new change in rev sell new

shipping change in exp tax on sale

installation change in deprec recover NWC

modification change in EBT net cash flow

training change in tax

invest in NWC change in EAT

net cash flow "undo" change in deprec

net cash flow

Replacement Project

Initial Cash Flow (t=0) Operating Cash Flows (t=1 ... n) Terminal Cash Flow (t=n)

purchase new change in rev sell new

shipping change in exp tax on sale

installation old deprec recover NWC

modification new deprec net cash flow

training change in deprec

invest in NWC change in EBT

sell old change in tax

tax on sale change in EAT

recover NWC "undo" change in deprec

net cash flow net cash flow