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1. Sabre International Inc. is considering updating its production process. The managers are considering replacing a machine which it purchased five years ago with an installed cost of $690,000. There are 3 years of depreciation remaining using the MACRS rates for a seven-year asset. The new machine, a Rev Tron 2K, will cost $800,000 and will require an additional $25,000 for delivery and installation. Last year, the company spent $4,000 sending the managers to a RevTron conference in Buffalo NY to learn about the new machine and its advantages. The old machine is expected to be sold for approximately $320,000 today or $25,000 ten years from now. In 10 years, it is expected the new machine could be sold for $125,000. Net working capital is expected to increase by $8,000 to start, remain at that level through the length of the project, and be reclaimed at the end of the project. If Sabre purchases the new equipment, annual revenues are expected to increase from $80,000 per year to $110,000 per year, however, the expenses are expected to decrease from $35,000 with the old equipment to $20,000 with the new machine in the first year. Beyond year 1, the company's expenses if they keep the old machine are expected to increase by $2,000 per year, while the new machine would require expense increases of $500 per year. After year 1, Revenues are expected to increase by 5% under both scenarios. The MACRS rates are based on a 7-year asset are (14.29%, 24.49%, 17.49%, 12.49%, 8.93%, 8.92%, 8.93%, and 4.46%). The marginal tax rate is 25%. a) (3.5 points) Calculate the year 0 total cash flow (10) which would be used for capital budgeting purposes. b) (3 points) Calculate the year 1 net cash flow which would be used for capital budgeting purposes. c) 3 points) Calculate the year 2 net cash flow which would be used for capital budgeting purposes. d) (4 points) Calculate the Terminal value which would be used for capital budgeting purposes. 1. Sabre International Inc. is considering updating its production process. The managers are considering replacing a machine which it purchased five years ago with an installed cost of $690,000. There are 3 years of depreciation remaining using the MACRS rates for a seven-year asset. The new machine, a Rev Tron 2K, will cost $800,000 and will require an additional $25,000 for delivery and installation. Last year, the company spent $4,000 sending the managers to a RevTron conference in Buffalo NY to learn about the new machine and its advantages. The old machine is expected to be sold for approximately $320,000 today or $25,000 ten years from now. In 10 years, it is expected the new machine could be sold for $125,000. Net working capital is expected to increase by $8,000 to start, remain at that level through the length of the project, and be reclaimed at the end of the project. If Sabre purchases the new equipment, annual revenues are expected to increase from $80,000 per year to $110,000 per year, however, the expenses are expected to decrease from $35,000 with the old equipment to $20,000 with the new machine in the first year. Beyond year 1, the company's expenses if they keep the old machine are expected to increase by $2,000 per year, while the new machine would require expense increases of $500 per year. After year 1, Revenues are expected to increase by 5% under both scenarios. The MACRS rates are based on a 7-year asset are (14.29%, 24.49%, 17.49%, 12.49%, 8.93%, 8.92%, 8.93%, and 4.46%). The marginal tax rate is 25%. a) (3.5 points) Calculate the year 0 total cash flow (10) which would be used for capital budgeting purposes. b) (3 points) Calculate the year 1 net cash flow which would be used for capital budgeting purposes. c) 3 points) Calculate the year 2 net cash flow which would be used for capital budgeting purposes. d) (4 points) Calculate the Terminal value which would be used for capital budgeting purposes