Luigi, the owner of the Terafazione Espresso Bar, is considering replacing his manual espresso machine with...
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Luigi, the owner of the Terafazione Espresso Bar, is considering replacing his manual espresso machine with an automated machine. Luigi bought a semi-automatic La Marzocco last year for $12,000. He is thinking about replacing it with a Verismo 801, which sells for $17,000. The 801 automatically measures and grinds beans. If he replaces the old Marzocco with the Verismo, then he expects to be able to make (and sell) more cups of coffee each year and he expects to save on labor costs because he won't have to hire highly skilled baristas. Luigi figures that revenues will increase by $3,000 and operating expenses will decrease by $1,000 per annum. If Luigi buys the Verismo, then he will have to increase his inventory of coffee beans by $800. If Luigi sells the Marzocco today, he will receive $8,000. If he uses it for another two years, then it will be worth $2,000. If Luigi buys the Verismo today, then he figures that he can sell it for $7,000 in two years. Both machines are classified as 3-year property with depreciation rates of 33.33%, 44.45%, 14.81%, and 7.41% over the four years. The company's tax rate is 30% and its cost of capital is 10%. If Luigi goes ahead with the replacement, what are the initial cash flows? (Round your answer to the nearest dollar.) If Luigi goes ahead with the replacement, what are the operating cash flows in the first year after replacement? (Round your answer to the nearest dollar.) What is free cash flow in the terminal year? (Round your answer to the nearest dollar.) Luigi, the owner of the Terafazione Espresso Bar, is considering replacing his manual espresso machine with an automated machine. Luigi bought a semi-automatic La Marzocco last year for $12,000. He is thinking about replacing it with a Verismo 801, which sells for $17,000. The 801 automatically measures and grinds beans. If he replaces the old Marzocco with the Verismo, then he expects to be able to make (and sell) more cups of coffee each year and he expects to save on labor costs because he won't have to hire highly skilled baristas. Luigi figures that revenues will increase by $3,000 and operating expenses will decrease by $1,000 per annum. If Luigi buys the Verismo, then he will have to increase his inventory of coffee beans by $800. If Luigi sells the Marzocco today, he will receive $8,000. If he uses it for another two years, then it will be worth $2,000. If Luigi buys the Verismo today, then he figures that he can sell it for $7,000 in two years. Both machines are classified as 3-year property with depreciation rates of 33.33%, 44.45%, 14.81%, and 7.41% over the four years. The company's tax rate is 30% and its cost of capital is 10%. If Luigi goes ahead with the replacement, what are the initial cash flows? (Round your answer to the nearest dollar.) If Luigi goes ahead with the replacement, what are the operating cash flows in the first year after replacement? (Round your answer to the nearest dollar.) What is free cash flow in the terminal year? (Round your answer to the nearest dollar.)
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To calculate the initial cash flows we need to consider the cash flows associated with buying the Ve... View the full answer
Related Book For
College Accounting A Contemporary Approach
ISBN: 978-0077639730
3rd edition
Authors: David Haddock, John Price, Michael Farina
Posted Date:
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