A. Prepare an incremental cash flow analysis
The following price quote has been identified: Retooling costs Set-up costs $535,000 82,000 In addition, the following incremental cash flows have been identified: Increased sales revenue for the first year is expected to be $177,000. Revenue will increase at approximately 4% per year for the following four years. Reduced operating costs for the first year are expected to be $103,000. Cost savings will diminish by 18% a year for the project's remaining four years. The retooled equipment will require $33,000 in additional maintenance costs for the first year. These additional costs will increase by 18% a year for the remaining four years. The retooled equipment will require an additional $30,000 in working capital. Working capital will be recaptured at the end of the investment horizon. The expected salvage value of the retooled equipment at the end of the five-year investment horizon is $41,000. Additional information: The new equipment and the retooling costs are considered 5-year property for depreciation purposes. XYZ Corporation utilizes the appropriate MACRS depreciation method for allocating capital costs. The applicable depreciation rates are shown below. Year 1: 20% a. b. Year 2: 32% C. Year 3: 19% d. Year 4: 12% e. Year 5: 11% f. Year 6: 6% The marginal corporate tax rate for XYZ Corporation is 25%. The following price quote has been identified: Retooling costs Set-up costs $535,000 82,000 In addition, the following incremental cash flows have been identified: Increased sales revenue for the first year is expected to be $177,000. Revenue will increase at approximately 4% per year for the following four years. Reduced operating costs for the first year are expected to be $103,000. Cost savings will diminish by 18% a year for the project's remaining four years. The retooled equipment will require $33,000 in additional maintenance costs for the first year. These additional costs will increase by 18% a year for the remaining four years. The retooled equipment will require an additional $30,000 in working capital. Working capital will be recaptured at the end of the investment horizon. The expected salvage value of the retooled equipment at the end of the five-year investment horizon is $41,000. Additional information: The new equipment and the retooling costs are considered 5-year property for depreciation purposes. XYZ Corporation utilizes the appropriate MACRS depreciation method for allocating capital costs. The applicable depreciation rates are shown below. Year 1: 20% a. b. Year 2: 32% C. Year 3: 19% d. Year 4: 12% e. Year 5: 11% f. Year 6: 6% The marginal corporate tax rate for XYZ Corporation is 25%
