Solomons Electronics Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by , a recently graduated BBA.

The production line would be set up in unused space in Solomons' main plant. The machinerys invoice price would be approximately $190,000, another $12,000 in shipping charges would be required, and it would cost an additional $25,000 to install the equipment. The machinery has an economic life of 4 years, and Solomons has obtained a special tax ruling that places the equipment in the MACRS 3-year class. The machinery is expected to have a salvage value of $30,000 after 4 years of use.

The new line would generate incremental sales of 1,350 units per year for 4 years at an incremental cost of $120 per unit in the first year, excluding depreciation. Each unit can be sold for $205 in the first year. The sales price and cost are both expected to increase by 4% per year due to inflation. Further, to handle the new line, the firms net working capital would have to increase by an amount equal to 13% of sales revenues. The firms tax rate is 35%, and its overall weighted average cost of capital, which is the risk-adjusted cost of capital for an average project (r), is 12%.

e. Estimate the required networking capital for each year, and the cash flow due to investments in net working capital. Annual Cash Flows due to Investments in Net Working Capital Year o Year 1 Year 2 Year 3 Year 4 Sales NWC (% of sales) CF due to investment in NOWC f. Calculate the after-tax salvage cash flow. After-tax Salvage Value Based on facts in Salvage value Book value Gain or loss Tax on salvage value Net terminal cash flor