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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
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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