Shark Attack, Inc. must analyze the feasibility of a new piece of equipment that has an estimated useful life of 8 years, and the firm would like your help to make this decision. The firm plans to depreciate the equipment to a zero book value using SSLD
The purchase price of the equipment is $500,000 and it will cost another 10 percent of this price to ship and properly install.
In addition, to safely operate the equipment, workers will require an extensive training session that will cost nearly $8,000. The firm has estimated that to begin using the machine, it will need to invest $70,000 in inventories.
At the same time accounts payable will increase by $35,000. At the end of its life, Baby Blue hopes to sell the machine to a smaller competitor for $112,000.
The machine is expected revenues attributable to the new machine to be $375,000 each year before tax, but sales of one of the firm's existing products will decline by $50,000 per year before tax.
In addition, cash operating expenses related to the new production process are expected to reach 38 percent of sales annually.
Shark requires an 18 percent return for this type of project, and its marginal tax rate is 40%. What are the after-tax cash flows associated with this proposed project?
A) The initial outlay?
B) OCFs in years 1-7?
C) Terminal year cash flows in year 8-separated into operating and non-operating after-tax flows?