Intial Interim Fin

Question 3
. The Faversham Fish Farm is considering the introduction of a new fish-flaking facility. To launch the
facility, it will need to spend $90,000 for special equipment. The equipment has a useful life of four
years and is in the three-year property class for tax purposes. Shipping and installation expenditures
equal $10,000, and the machinery has an expected final salvage value, four years from now, of $16,500.
The machinery is to be housed in an abandoned warehouse next to the main processing plant. The old
warehouse has no alternative economic use. No additional “net” working capital is needed. Assuming
that the marginal tax rate equals 40 percent, we now need to estimate the project’s relevant
incremental cash flows.
Calculate intial , interim ,and terminal cash flow,
Question 4
we suppose that we are considering the purchase of a new automotive-glass mold to replace an old
mold and that we need to obtain cash-flow information to evaluate the attractiveness of this project.
The purchase price of the new mold is $18,500, and it will require an additional $1,500 to install,
bringing the total cost to $20,000. The old mold, which has a remaining useful life of four years, can be
sold for its depreciated (tax) book value of $2,000. The old mold would have no salvage value if held to
the end of its useful life. Notice that, as salvage value equals tax book value, taxes due to the sale of the
old asset are zero.
The new machine should cut labor and maintenance costs and produce other cash savings totaling
$7,100 a year before taxes for each of the next four years, after which it will probably not provide any
savings nor have a salvage value. These savings represent the net operating revenue savings to the firm
if it replaces the old mold with the new one. Remember, we are concerned with the differences in the
cash flows resulting from continuing to use the old mold versus replacing it with a new one. Suppose
that the new mold we are considering falls into the three-year property category for MACRS
depreciation. Moreover, assume the following in regards to the old mold: 1. The original depreciable
basis was $9,000. 2. The mold fell into the three-year property class. 3. The remaining depreciable life is
two years
Question 7 done
Pilsudski Coal Company is considering the replacement of two machines that are three years old with a
new, more efficient machine. The two old machines could be sold currently for a total of $70,000 in the
secondary market, but they would have a zero final salvage value if held to the end of their remaining
useful life. Their original depreciable basis totaled $300,000. They have a depreciated tax book value of
$86,400, and a remaining useful life of eight years. MACRS depreciation is used on these machines, and
they are five-year property class assets. The new machine can be purchased and installed for $480,000.
It has a useful life of eight years, at the end of which a salvage value of $40,000 is expected. The
machine falls into the five-year property class for accelerated cost recovery (depreciation) purposes.
Owing to its greater efficiency, the new machine is expected to result in incremental annual operating
savings of $100,000. The company’s corporate tax rate is 40 percent, and if a loss occurs in any year on
the project, it is assumed that the company can offset the loss against other company income. What are
the incremental cash inflows over the eight years, and what is the incremental cash outflow at time 0?
Question 1 done
Thoma Pharmaceutical Company may buy DNA-testing equipment costing $60,000. This equipment is
expected to reduce labor costs of the clinical staff by $20,000 annually. The equipment has a useful life
of five years but falls in the three-year property class for cost recovery (depreciation) purposes. No
salvage value is expected at the end. The corporate tax rate for Thoma (combined federal and state) is
38 percent, and its required rate of return is 15 percent. (If profits after taxes on the project are negative
in any year, the firm will offset the loss against other firm income for that year.) On the basis of this
information, what are the relevant cash flows?
Question no 2 done
In Problem 1, suppose that 6 percent inflation in savings from labor costs is expected over the last four
years, so that savings in the first year are $20,000, savings in the second year are $21,200, and so forth.
a. On the basis of this information, what are the relevant cash flows? b. If working capital of $10,000
were required in addition to the cost of the equipment and this additional investment were needed over
the life of the project, what would be the effect on the relevant cash flows? (All other things are the
same as in Problem 2, Part (a).)
Question no 6 done
US Blivet is contemplating the purchase of a more advanced blivet-extrusion machine to replace the
machine currently being used in its production process. The firm’s production engineers contend that
the newer machine will turn out the current volume of output more efficiently. They note the following
facts in support of their contention. l The old machine can be used for four more years. It has a current
salvage value of $8,000, but if held to the end of its useful life, the old machine would have an estimated
final salvage value of $2,000. This is the final year that tax depreciation will be taken on the machine,
and the amount of depreciation is equal to the machine’s remaining depreciated (tax) book value of
$4,520. l The new, advanced blivet-extrusion machine costs $60,000. Its final salvage value is projected
to be $15,000 at the end of its four-year useful life. The new machine falls into the three-year property
category for MACRS depreciation. l The new machine will reduce labor and maintenance usage by
$12,000 annually. l Income taxes on incremental profits are paid at a 40 percent rate. Calculate the
expected annual incremental cash flows for years 1 through 4, as well as the estimated initial cash
outflow.

Intial Interim Fin

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Question 3

Calculate intial , interim ,and terminal cash flow,

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