Question
Shown below is information regarding the Miami Publishing capital budgeting project. Miami Publishing Company Capital Budgeting project The Miami Publishing Company is a publisher of
Shown below is information regarding the Miami Publishing capital budgeting project.
Miami Publishing Company Capital Budgeting project
The Miami Publishing Company is a publisher of textbooks. Miami is considering replacing an older manual printing press with a newer, computerized one. It is expected that the new printing press will allow Miami to increase its output of textbooks and, therefore, increase its sales revenues. Further, since the new machine is computerized, it will require only one operator instead of the two required by the older machine. Miami pays a marginal tax rate of 40%.
The old machine was purchased 10 years ago and had a total useful life of thirteen years. It originally cost $130,000 and was being depreciated by the simplified straight-line method at a rate of $10,000 per year. Since the old machine uses such outmoded technology, it can be sold today for only $45,000. The old machine required two operators who each earned $25,000 per year (salary expense). The old machine required $7,500 in maintenance expense each year. It produced a total of $10,000 per year of defective textbooks that could not be sold (defective product expense).
The new machine being considered will cost $215,000 and will require $1,000 shipping and $500 installation fees. In addition, Miami anticipates spending $3500 to modify the new machine for their special conditions. The new machine will be sold after three years. It will be depreciated using MACRS with a 3-year investment class. At the end of three years of use, the new machine is expected to be sold for $85,000. The new machine requires only one operator who will earn $35,000 per year (salary expense). The new machine will require $7,500 in maintenance expense each year. The new machine will produce $10,000 per year of defective textbooks (defective product expense).
Since the new machine will operate so much faster than the old one, an additional $10,000 will be invested in inventory (net working capital). Also, an increase in sales revenue of $27,500 per year is expected.
MACRS Depreciation Schedule
Ownership Class of investment
Year 3-year 5-year 7-year 10-year
1 33% 20% 14% 10%
2 45 32 25 18
3 15 19 17 14
4 7 12 13 12
5 11 9 9
6 6 9 7
7 9 7
8 4 7
9 7
10 6
11 3
Use the information above to calculate the operating cash flows for the Miami Publishing capital budgeting project.
Given below are the cash flow patterns for capital budgeting.
Expansion Project
Initial Cash Flow (t=0) Operating Cash Flows (t=1 - n) Terminal Cash Flow (t=n)
purchase new change in rev sell new
shipping change in exp tax on sale
installation change in deprec recover NWC
modification change in EBT net cash flow
training change in tax
invest in NWC change in EAT
net cash flow undo change in deprec
net cash flow
Replacement Project
Initial Cash Flow (t=0) Operating Cash Flows (t=1 n) Terminal Cash Flow (t=n)
purchase new change in rev sell new
shipping change in exp tax on sale
installation old deprec recover NWC
modification new deprec net cash flow
training change in deprec
invest in NWC change in EBT
sell old change in tax
tax on sale change in EAT
recover NWC undo change in deprec
net cash flow net cash flow
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started