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 $5,550,000 and cash expenses of $3.795,000 one-third of which are labor costs. The current level of investment in this existing division is $12,400,000 (Sales and costs of this division are not affected by the investment decision regarding the complementary line) Mendoza estimates that incremental (noncash) net working capital of 546.000 will be needed to support the new business line. No additional facilities 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 $466,000 per year Raw materials costs associated with the new line are expected to be $1,600,000 per year, while the total labor cost is expected to double The CFO of the company estimates that new machinery costing $4,500,000 would need to be purchased. This machinery has a six year useful life and an estimated salvage terminah value of $720,000. For tax purposes assume that the Mendoza Company would use the straight line method with estimated salvage value considered in the cakulation) Assume, further that the weighted average cost of capital (WACC) for Mendoza is 14% (after-tax) and that the combined (federal and state) income tax rate is 13%. Finally, assume that the new business line is expected to generate annual cash revenue of $4,400,000 Required: Determine relevant cash flow of tax at each of the following three points: (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 for the salvage value used to establish the annual straight line depreciation deductions further you can assume that at the end of the project's ife Mendoza willfully recover its initial investment in networking capital Complete this question by entering your answers in the tabs below. Required 2 Required Determine relevant cash low (after-tax) a project disposal (termination) pe here to search RI F1 F2 F3 F4 F5 F6 F7 F11 F8 F9 F10 0 g # $ % A & * Soved 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 $5,550,000 and cash expenses of $3.795.000, one third of which are labor costs. The current level of Investment in this existing division is $12,400,000. (Sales and costs of this division are not affected by the investment decision regarding the complementary line.) Mendoza estimates that incremental (noncash) net working capital of $46,000 will be needed to support the new business line No additional facilities 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 foverhead costs of $466.000 per year. Raw materials costs associated with the new line are expected to be $1,600,000 per year, while the total labor cost is expected to double The CFO of the company estimates that new machinery costing $4,500,000 would need to be purchased. This machinery has a six- year useful life and an estimated salvage terminal value of $720,000. For tax purposes, assume that the Mendoza Company would use the straight-line method with estimated salvage value considered in the calculation) Assume, further that the weighted average cost of capital (WACC)for Mendoza is 14% (after tax) and that the combined (federal and state) income tax rate is 43%. Finally, assume that the new business line is expected to generate annual cash revenue of $4,400,000 Required: Determine relevant cash flows after tax) at each of the following three points (project initiation project operation, and (3project disposal termination). For purposes of this last calculation, you can assume that the asset is sold at the end of its useful life for the salvage value used to establish the annual straight-line depreciation deductions further, you can assume that at the end of the project's ufe Mendoza will fully recover its initial investment in net woring capital Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required Determine relevant cash flow (after tax) at project initiation Required 2 > Type here to search r F1 E GA 55 CZ SO FO