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What are the principles that must be adhered to in estimating After-Tax Incremental Casht Flows? Basket Wonders (BW) is considering the purchase of a new basket weaving machine

Finance Sep 01, 2020

What are the principles that must be adhered to in estimating After-Tax Incremental Casht Flows? Basket Wonders (BW) is considering the purchase of a new basket weaving machine. The machine will cost $50,000 plus $20,000 for shipping and installation and falls under the 3-year MACRS class. NWC will rise by $5,000. Lisa Miller forecasts that revenues will increase by $110,000 for each of the next 4 years and will then be sold (scrapped) for $10,000 at the end of the fourth year, when the project ends. Operating costs will rise by $70,000 for each of the next four years. BW is in the 40% tax bracket

Expert Solution

ANSWER

INITIAL CASH FLOW = 50000 + 20000 +5000 - 0 - 0 = 75000

INCREMENTAL CASH FLOWS

  YEAR 1 YEAR 2 YEAR 3 YEAR 4
  40000 40000 40000 40000
LESS 23331 31115 10367 5187
  16669 8885 29633 34813
LESS 6668 3554 11853 13925
  10001 5331 17780 20888
ADD 23331 31115 10367 5187
  33332 36446 28147 26075

TERMINAL YEAR CASH FLOWS

INCREMENTAL CASH FLOW FROM YEAR 4 26075
SALVAGE VALUE 10000
DEPRECIATION (0.4(40000-0) -4000
NWC - PROJEECT ENDS 5000
TERMINAL YEAR CASH FLOWS 37075
  YEAR 0 YEAR 1 YEAR 2 YEAR 3 YEAR 4
NET CASH FLOWS -75000 33332 36446 28147 37075
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