FIN 331 Homework Capital Budgeting and Cash Flows Your firm is considering replacing a machine that originally cost $275,000 with a new machine costing $340,000. It will also cost $10,000 to install the new machine. The new machine has a much higher output and would increase sales by $110,000 each year. The new machine is also more efficient and will save $10,000 in operating costs annually. The new machine would take more floor space causing the firm to cease leasing a portion of it plant at $15,000 per year. The new machine will be depreciated under the three year MACRS class over a three-year project life. The new equipment will increase inventories by $8,000 and increase accounts payable by $15,000. The old equipment being replaced can be sold today for $50,000. The old machine was being depreciated using MACRS three-year life and had been used for three years. Other important information for your decision is as follows. The firms tax rate is 30%. The firms cost of capital is 8%. At the end of the three-year use of the new equipment, the equipment can be sold for $70,000. What are the projects cash flows? A. The total cost of the new asset = $275,000+$10,000=$285,000. B. Change in Net Working Capital = $15,000-$8000 = $7,000 C. Net Cash flow from sale of old asset initial investment = 50,000 + ($-30,750).30= $40,775 D. Change in revenues =$110,000 - $15,000 = $95,000 E. Change in operating costs = decrease cost by $10,000 per year F. Year Decreciation Expense (new) 1 $350,000 x .33=$115,500 2 $350,000 x .45=$157,500 3 $350,000 x .15=$52,500 4 $350,000 x .07=$24,500 Old depreciation Year Deprciation 1 $275,000 x .33=$90,750 2 $275,000 x .45=$123,750 3 $275,000 x .15=$41,250 4 $275,000 x .07=$19,250 (115,500 41,250) = 74,250 year 1 (157,500 19,250) = 138,248 year 2 (41,250) = year 3 chenge in tax year 1=9225 year 2=9974 year 3=19,125