Your company is considering a new project which requires a new machine. The price of the...

    

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Your company is considering a new project which requires a new machine. The price of the machine is $60,000, and an additional installation cost of $6,000 is required. In five years, the machine can be sold for $5,000. Assuming the tax rate is 20%, the appropriate discount rate for the project is 10%, and the machine applies five-year MACRS for tax purpose. To start the project, it also requires $30,000 net working capital, and this amount will be recovered when the project is terminated in five years. If the project is accepted, the amount of cash sales will be increased for each year during the project life, in which the amounts are as follows, Year 1 2 3 4 5 Increase in cash sales $22,000 $22,000 $14,000 $32,000 $10,000 The following table shows the depreciation rates. Year 3-year MACRS (%) 1 33.33 44.45 14.81 7.41 2 3 4 5 6 7 8 5-year MACRS (%) 20.00 32.00 19.20 11.52 11.52 5.76 1 7-year MACRS (%) 14.29 24.49 17.49 12.49 8.93 8.92 8.93 4.46 a) Calculate the depreciation expense for each year from year 1 to year 5. (5 marks) b) Calculate the operating cash flows for each year from year 1 to year 5. (5 marks) c) Calculate the net capital spending for each year from year 0 to year 5. (4 marks) d) Calculate the net present value of the project, and decide whether the company should take the project (8 marks) or not. Your company is considering a new project which requires a new machine. The price of the machine is $60,000, and an additional installation cost of $6,000 is required. In five years, the machine can be sold for $5,000. Assuming the tax rate is 20%, the appropriate discount rate for the project is 10%, and the machine applies five-year MACRS for tax purpose. To start the project, it also requires $30,000 net working capital, and this amount will be recovered when the project is terminated in five years. If the project is accepted, the amount of cash sales will be increased for each year during the project life, in which the amounts are as follows, Year 1 2 3 4 5 Increase in cash sales $22,000 $22,000 $14,000 $32,000 $10,000 The following table shows the depreciation rates. Year 3-year MACRS (%) 1 33.33 44.45 14.81 7.41 2 3 4 5 6 7 8 5-year MACRS (%) 20.00 32.00 19.20 11.52 11.52 5.76 1 7-year MACRS (%) 14.29 24.49 17.49 12.49 8.93 8.92 8.93 4.46 a) Calculate the depreciation expense for each year from year 1 to year 5. (5 marks) b) Calculate the operating cash flows for each year from year 1 to year 5. (5 marks) c) Calculate the net capital spending for each year from year 0 to year 5. (4 marks) d) Calculate the net present value of the project, and decide whether the company should take the project (8 marks) or not.