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This exercise parallels the machine-purchase decision for the Mendoza Company that is discussed in the body of the chapter. Assume that Mendoza is exploring whether to enter a complementary line of business. The existing business line generates annual cash revenues of approximately $5,300,000 and cash expenses of $3,690,000, one-third of which are labor costs. The current level of Investment In this existing division is $12,150,000. (Sales and costs of this dlvision are not affected by the investment dec'sion regarding the complementary line. 0.25 points Mendoza estimates that Incremental (noncash) net working capital of $36,000 will be needed to support the new usiness ine. No additional facilties-level costs would be needed to support the new line-there is currently sufficient excess capacity. However, the new line would require additional cash expenses (overhead costs) of $430,000 per year. Raw materials costs assoclated with the new line are expected to be $1,350,000 per year, while the total labor cost is eBook expected to double. The CFO of the company estimates that new machinery costing $3,250,000 would need to be purchased. This References machinery has a five-year useful lite and an estimated salvage (terminal) value of $520,000. For tax purposes, assume that the Mendoza Company would use the straight-lne method(wth estimated sa vage value cons dered in the calculation) Assume, further, that the weighted-average cost of capital (MACC) 10r Mendoza s 9% (after-tax) and that the combined federal and state) income tax rate is 3g%. Finally, assume that the new business line is expected to generate annual cash revenue of $3,900,000 Required: Determine relevant cash flows (after-tax) at each of the following three points: (1 project initiation, 2) project operation, and (3) project disposal (termination). For purposes of this last calculation, you can assume that the asset is sold at the end of its useful life or the salvage value used to establish the annual straight-line depreclation deductions, further, you can assume that at the end of the project's lfe Mendoza will fully recover ts initial investment in net working cap tal. Complete this question by entering your answers in the tabs below Required Required Required Determine relevant cash flow (after-tax) at project operation. (Do not round intermediate calculations.) Annual After-tax Cash Inflow (time periods 1 cash revenues Incremental cash expenses: Incremental non-cash expenses: Incremental operating income After-tax operating income Annual after-tax cash infow Required 1 Required 3 >
