Mitch and Lydia Brenner own a small factory located in Bodega Bay, California. They manufacture rubber snakes used to scare birds away from houses, gardens, and playgrounds. The recent and unexplained increase in the bird population in northern California has significantly increased the demand for the Brenners products. To take advantage of this marketing opportunity, they plan to add a new molding machine that will double the output of their existing facility. The cost of the new machine is $20,000. The machine setup fee is $2,000. With this purchase, current assets must increase by $5,000 and current liabilities will increase by $3,000. The economic life of the new machine is four years, and it falls under the MACRS three-year depreciation schedule. The machine is expected to be obsolete at the end of the fourth year and have no salvage value. Cash Flows and Capital Budgeting The Brenners anticipate recouping 100 percent of the additional investment in net working capital at the end of year 4. Sales are expected to increase by $20,000 each year in years 1 and 2. By year 3, the Brenners expect sales to be mostly from repeat customers purchasing replacements instead of sales to new customers. Therefore, the increase in sales for years 3 and 4 is estimated to only be $10,000 in each year. The increase in operating expenses is estimated to be 20 percent of the annual change in sales. Assume the marginal tax rate is 40 percent. Show your work in excel.

a. Calculate the initial net incremental cash flow.

b. Calculate the net incremental operating cash flows for years 1 through 4. Round all calculations to the nearest whole dollar. Use Table 4-1 to calculate the depreciation expense.

FIGURE 4-1 Acme Corporation Income Statement for the Year Ended December 31, 2018 Net Sales Cost of Goods Sold Gross Profit Depreciation Expense S&A Expenses Operating Income (EBIT) Interest Expense Income before Taxes Income Taxes (25%) Combined Federal and State Net Income 15,000,000 5,000,000 10,000,000 2,000,000 800,000 7,200,000 1,710,000 5,490,000 1,373,000 S 4,117,000 Earnings per Share (4,117,000 shares) Common Stock Dividends Paid 1.00 S 400,000 $ 3,717,000 Change in Retained Earnings