Alternative 2 replace the existing machine with a new

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Unformatted text preview: 64,500 2 1,175,000 839,800 3 1,300,000 914,900 4 1,425,000 989,900 5 1,550,000 998,900 The new machine would result in an increased investment in net working capital of $22,000. At the end of 5 years, the new machine could be sold to net $25,000 before taxes. The firm is subject to a 40% tax on both ordinary income and capital gains. As noted, the company uses MACRS depreciation. (See Table 3.2 on page 100 for the applicable depreciation percentages.) Required a. Calculate the initial investment associated with each of Clark Upholstery’s alternatives. b. Calculate the incremental operating cash inflows associated with each of Clark’s alternatives. (Note: Be sure to consider the depreciation in year 6.) c. Calculate the terminal cash flow at the end of year 5 associated with each of Clark’s alternatives. d. Use your findings in parts a, b, and c to depict on a time line the relevant cash flows associated with each of Clark Upholstery’s alternatives. e. Solely on the basis of your comparison of their relevant cash flows,...
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This document was uploaded on 01/19/2014.

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