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The equipment would cost $300,000, plus a shipping cost of $20,000 and $22,000 in installation fees. This equipment has an economic life of 4 years,

The equipment would cost $300,000, plus a shipping cost of $20,000 and $22,000 in installation fees. This equipment has an economic life of 4 years, and the company's accountingdepartment has noted that this equipment is classified for aMACRS 3-year class. The machinery is expected to have a salvage value of $15,000 after 4 years of use.

The marketing department has provided the following 4-year sales forecast for the new products made from this equipment. The price and the cost per unit is given below:

Four Year Sales Forecast

Description Year 1 Year 2 Year 3 Year 4
Units 1,500 1,575 1,605 1,626
Sales Price per Unit $240 $252 $264 $276
Unit Cost $100 $105 $110 $115

The sales price and cost are expected to increase by 4.8% per year due to inflation. Further, to handle the new line, the firm's net working capital would have to increase by an amount equal to 12% of sales revenues. The firm's tax rate is 42%, and its overall weighted average cost of capital is 12.8%.

Equipment Cost $300,000
Shipping Charge $20,000
Installation Charge $22,000
Economic Life 4
Salvage Value $15,000
Tax Rate 42.0%
Cost of Capital 12.8%
Net Working Capital/Sales 12.0%

Depreciable Basis = Equipment + Freight + Installation

Depreciable Basis = $342,000

Year % Basis

Depreciation

(% x Basis)

Remaining Book Value
1 0.3333 $342,000 $113,989 $228,011
2 0.4445 $342,000 $152,019 $75,992
3 0.1481 $342,000 $50,650 $25,342
4 0.0741 $342,000 $25,342 $0

Write a 1,050 to 1,400-word analysis in which you do the following:

  • Construct annual incremental operating cash flow statements for the next 4 years.
  • Calculate the net present value (NPV) based on your projected cash flows.
  • Provide rationale explaining why Custom Molds & Casting Company should purchase this equipment.
  • Discuss what other factors you need to consider in your decision.
  • Conduct a sensitivity analysis.

Assume that the new product line is expected to decrease sales of the firm's other lines by $50,000 per year. Should this be considered in the analysis? Why or why not? If so, how?

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