Problem:
A company wants to update their assets by buying some new machinary and selling some old equipment. The new machinary will cost $100,000 and will be depriciated using 3- year MACROS (33%, 45%, 15%, 7%). At the end of the third year, the machinary is expected to be sold for $10,000.
The old equipment was bougt three years ago for $60,000 and was being depreciated over four years using straight-line depreciation. It can be sold today for $10,000. If they do not buy the new machinary and replace the old equipment, then the old equipment is expected to be held for another 3 years at which point it will be worthless.
Regardless of whether they buy the new machinary, Sales will be $500,000 for the next three years, COGS will fall from 70% of Sales to 60% of Sales if they buy the new machinary. The tax rate is 40%
Required:
Question 1: What is the Net Investment (initial Cash outflow or CF0) for this project?
Question 2: What is the Depreciation Expense?
Question 3: What is the Operating Cash Flow in year two for this project
Question 4: What is the after tax salvage value of selling the new machinary in three years?
Note: Explain all steps comprehensively.