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 $4,470,000 and cash expenses of $3,687,000, one-third of which are labor costs. The current level of investment in this existing division is $12,900,000. (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 $39,000 will be needed to support the new business line. No additional facilities-level costs would be needed to support the new linethere is currently sufficient excess capacity. However, the new line would require additional cash expenses (overhead costs) of $440,000 per year. Raw materials costs associated with the new line are expected to be $1,440,000 per year, while the total labor cost is expected to double. The CFO of the company estimates that new machinery costing $3,615,000 would need to be purchased. This machinery has a six-year useful life and an estimated salvage (terminal) value of $578,400. 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 16% (after-tax) and that the combined (federal and state) income tax rate is 41%. Finally, assume that the new business line is expected to generate annual cash revenue of $4,095,000.

Determine relevant cash flow (after-tax) at project operation. (Do not round intermediate calculations.)

1.Determine relevant cash flow (after-tax) at project initiation

After-tax cash flow at project initiation______________

2.

Annual After-tax Cash Inflow (time periods 1 through 6):
Incremental cash revenues		$
Incremental cash expenses:
	________
Depreciation (SL basis)
Incremental non-cash expenses:
		$3,458,000
Incremental operating income		637,000
After-tax operating income		$637,000
Annual after-tax cash inflow		$637,000

3.

Determine relevant cash flow (after-tax) at project disposal (termination).

	After-tax cash flow at project termination (end of year 6)