II. Problems (50 Marks)

1. A company is considering purchasing a new machine. The machine will cost $50,000 plus

$20,000 for shipping and installation and falls under the 3-year MACRS class. The Net Working Capital (NWC) of the company will rise by $5,000. Estimation forecasts that revenues will increase by $110,000 for each of the next 4 years and will then be sold (scrapped) for $10,000 at the end of the fourth year, when the project ends. Operating costs will rise by $70,000 for each of the next four years. The company is in the 40% tax bracket.

Requirement:

Q1. Calculate the Initial Cash Outflow of the company (10 marks)

Q2. Calculate the Incremental Cash Flows of the company for year 1 to 4 (10 marks) Q3. Calculate the Terminal-Year Incremental Cash Flows of the company (10 marks)