Week 7: Homework 0 Saved 1 References This exercise parallels the machinepurchase decision for the Mendoza Company that is discussed in the body ofthe 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 $3,395,000, on ethird 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 lnoncash] net working capital of $46,000 will be needed to support the new business line. No additional facilitieslevel 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 $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 ofthe 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 straightline method [with estimated salvage value considered in the calculation}. Assume, further, that the weightedaverage cost of capital {WACC} for Mendoza is 14% [aftertax) 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 ows {aftertax} at each of the following three points: {1] project initiation, (2] project operation, and {3) project disposal [termination]. For purposes ofthis 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 straightline depreciation deductions; further, you can assume that at the end ofthe project's life Mendoza will fully recover its initial investment in net working capital. Complete this question by entering your answers in the labs below. Required 1 Required 2 Required 3 Determine relevant cash ow (after-tax) at project initiation. Required 2 ) Week 7: Homework 0 Saved 1 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 ows {aftertax} at each of the following three points: {1] project initiation, {2] project operation, and {3) project disposal [termination]. For purposes ofthis last calculation, you can assume that the asset is sold at the end of its useful life for the 1" salvage value used to establish the annual straightline depreciation deductions; further, you can assume that at the end ofthe Wm project's life Mendoza will fullyr recover its initial investment in net working capital. El Complete this question by entering your answers in the labs below. eBook . Required 1 Required 2 Required 3 Ask Determine relevant cash ow (after-tax) at project operation. (Do not round intermediate calculations.) 5 Prim Incremental cash revenues Ii|_| Incremental cash expenses: References Labor Overhead Raw materials Incremental noncash expenses: Depreciation (SL basis) Incremental operating income ess: Income tax Aftertax operating income Annual aftertax cash inow $ 0