Aqua has grown in recent years and its orders have increased. To fulfill these orders, the company wants to invest in a new packing machine. For this he decides to make a capital budget below we present the information:

1.The price of the new machine is $250,000

2.Installation and transportation cost estimated at $25,000

3.$10,000 working capital investment is expected

4.The company doesn't plan to sell any of its old machines.

5. The project will increase revenue by $500,000

6.The depreciation of the machine is 5 years. Depreciation is linear (same amount every year)

7.Incremental costs will be 25% of the initial investment

8.The residual value of the asset will be 20% of the total cost of the equipment

9.Taxes 20%

10.Duration of the project is 5 years

Instructions

1.Prepare a capital budget (table A)

2.Prepare a net cash flow table (table B)

3.Answer the following question: According to the results of the budget

capital, do you think this investment can help the company? Why?

Capital proposal

1.Determine Initial Investment

+Active acquisition price

+Transportation cost

-Price of sale of old equipment

+Investment in working capital

+Taxes on the sale of old equipment

Initial net investment

2.Determine net cash flows

+Incremental Revenue

-Incremental Costs

-Depreciation

Increased tax profit

-Taxes

Incremental tax utility

+ depreciation

Annual net cash flow

3.Determination of terminal cash flow

Residual value

-Taxes plus-money

+Capital investment recovery

Final cash flow