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DEF company is considering purchasing a new rubber extrusion line that produces rolling bands, flanks, and other products used in the process of tire manufacturing. This line will replace the existing one, which was purchased 4 years ago for $200,000, at an installation cost of $50,000; it was depreciated under straight-line amortization, and with 4 years of usable life remaining. The new line is more expensive (it costs $800,000 and does not have any additional installation costs), but at the same time requires an increase in accounts receivable by $800,000, inventories by $200,000 and accounts payable by $500,000. DEF company can sell the existing line for $150,000 without incurring any additional costs. In addition, suppose the new rubber extrusion line is amortized for 5 years, with the following methods: 20% in year 1, 30% in year 2, 15% in year 3, 10% in year 4 and 5% in year 5. At the end of 5 years, the existing line would have a market value of zero; the new line would be sold to net $100,000 after removal and clean-up costs and before tax. The firm is subject to 24% tax rate. The following table shows the estimated eamings before interest, tax, depreciation, and amortization over the 5 years for both the new and the existing line. Eamings before interest, taxes, depreciation, and amortization Existing line $280,000 Year Alternative new line $250,000 1 | 250,000 250,000 3 250,000 220,000 4 250,000 180,000 250,000 150,000

DEF company is considering purchasing a new rubber extrusion line that produces rolling bands, flanks, and other products used in the process of tire manufacturing. This line will replace the existing one, which was purchased 4 years ago for $200,000, at an installation cost of $50,000; it was depreciated under straight-line amortization, and with 4 years of usable life remaining. The new line is more expensive (it costs $800,000 and does not have any additional installation costs), but at the same time requires an increase in accounts receivable by $800,000, inventories by $200,000 and accounts payable by $500,000. DEF company can sell the existing line for $150,000 without incurring any additional costs. In addition, suppose the new rubber extrusion line is amortized for 5 years, with the following methods: 20% in year 1, 30% in year 2, 15% in year 3, 10% in year 4 and 5% in year 5. At the end of 5 years, the existing line would have a market value of zero; the new line would be sold to net $100,000 after removal and clean-up costs and before tax. The firm is subject to 24% tax rate. The following table shows the estimated eamings before interest, tax, depreciation, and amortization over the 5 years for both the new and the existing line. Eamings before interest, taxes, depreciation, and amortization Existing line $280,000 Year Alternative new line $250,000 1 | 250,000 250,000 3 250,000 220,000 4 250,000 180,000 250,000 150,000

Financial Management: Theory & Practice
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter11: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 1P: Talbot Industries is considering launching a new product. The new manufacturing equipment will cost...
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DEF company is considering purchasing a new rubber extrusion line that produces rolling bands, flanks, and other products used in the process of tire manufacturing. This line will replace the existing one, which was purchased 4 years ago for $200,000, at an installation cost of $50,000; it was depreciated under straight-line anmortization, and with 4 years ofusable life remaining. The new line is more expensive (it costs $800,000 and does not have any additional installation costs), but at the same time requires an increase in accounts receivable by $800,000, inventories by $200,000 and accounts payable by $500,000. DEF company can sell the existing line for $150,000 without incurring any additional costs. In addition, suppose the new rubber extrusion line is amortized for 5 years, with the following methods: 20% in year 1, 30% in year 2, 15% in year 3, 10% in year 4 and 5% in year 5. At the end of 5 years, the existing line would have a market value of zero; the new line would be sold to net $100,000 after removal and clean-up costs and before tax. The firm is subject to 24% tax rate. The following table shows the estimated eamings before interest, tax, depreciation, and amortization over the 5 years for both the new and the existing line. Eamings before interest, taxes, depreciation, and amortization Existing line $280,000 Year Alternative new line 1 $250,000 2 250,000 250,000 3. 250,000 220,000 4 250,000 180,000 250,000 150,000
Transcribed Image Text:DEF company is considering purchasing a new rubber extrusion line that produces rolling bands, flanks, and other products used in the process of tire manufacturing. This line will replace the existing one, which was purchased 4 years ago for $200,000, at an installation cost of $50,000; it was depreciated under straight-line anmortization, and with 4 years ofusable life remaining. The new line is more expensive (it costs $800,000 and does not have any additional installation costs), but at the same time requires an increase in accounts receivable by $800,000, inventories by $200,000 and accounts payable by $500,000. DEF company can sell the existing line for $150,000 without incurring any additional costs. In addition, suppose the new rubber extrusion line is amortized for 5 years, with the following methods: 20% in year 1, 30% in year 2, 15% in year 3, 10% in year 4 and 5% in year 5. At the end of 5 years, the existing line would have a market value of zero; the new line would be sold to net $100,000 after removal and clean-up costs and before tax. The firm is subject to 24% tax rate. The following table shows the estimated eamings before interest, tax, depreciation, and amortization over the 5 years for both the new and the existing line. Eamings before interest, taxes, depreciation, and amortization Existing line $280,000 Year Alternative new line 1 $250,000 2 250,000 250,000 3. 250,000 220,000 4 250,000 180,000 250,000 150,000
i. Compute the initial investment associated with the alternative line. i. Compute the incremental operating cash flows associated with the alternative line replacement.
Transcribed Image Text:i. Compute the initial investment associated with the alternative line. i. Compute the incremental operating cash flows associated with the alternative line replacement.
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