Cash Flow and Risk production line would be set up in M&M Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by Tashay Wilcox, a recently graduated MBA. The unused space in M&m's main plant. The machinery's invoice price would be approximately $, another $12,000 in shipping charges would be required, and it would cost an additional $28,000 to install the equipment. The machinery has an economic life of 4 years, and M&M has obtained a special tax ruling that places the equipment in the MACRS 3year class. The machinery is expected to have a salvage of $26,000 after 4 years of use. value Each unit The new line would generate incremental sales of 1,250 units per year for 4 years at an incremental cost of $ per unit in the first year, excluding depreciation. sales price and cost are both expected to increase by 3% per year due to inflation. Further, to handle the new line, the firm's net working capital would have to increase revenues. The firm's tax rate is 35%, and its overall weighted average cost of capital is 10%. Group 3 Group 2 215,000 Group 4 Group 5 220,000 225,000 235,000 Invoice Price Cost per unit Sales PPU Group 1 205,000 102 202 D 103 203 104 204 F G 105 205 H 106 206 J Group 6 240,000 107 207 K Group 7 245,000 108 208 L M N O P S can be sold for $ in the first year. The by an amount equal to 12% of sales

of $36000 after 4 years of whe a. Define "incremental cash flow" (1) Should you subtract interest expense or dividends when calculating project cash flow? Explain. (2) Suppose the firm spent $100,000 last year to rehabilitate the production line site. Should this be included in the analyis? fxplain. (3) Now assume the plant space could be leased out to another firm at $25,000 per year. Should this be inchuded in the analysis? If so, how? (4) Finally, assume that the new product line is expected to decrease sales of the firm's other lines by $50,000 per year. Should this be considered in the analysis? if so, how b. Disregard the assumptions in part a. What is the firm's depreciable basis? What are the annual depreciation expenses