Overhead 442000 Raw materials 1420000 Labor 1235000 Incremental non cash

Overhead 442000 raw materials 1420000 labor 1235000

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Overhead $442,000 Raw materials $1,420,000 Labor $1,235,000 Incremental non-cash expenses: Depreciation (SL basis) $546,000 Incremental operating income Less: Income tax (@40%) After-tax operating income Plus: Noncash charges (depreciation)
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Annual after-tax cash inflow 3. Project termination (end of year 7): Recovery of incremental investment in net working cap Salvage value of machine: Estimated terminal value $624,000 Tax Effect (@40%) $0 4. Irrelevant items:
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Purchase Decision doza Company that is discussed in the body a complementary line of business. The mately $5,000,000 and cash expenses of investment in this existing division is e investment decision regarding the $30,000 will be needed to support the new support the new line--there is currently ditional cash expenses (overhead costs) of ith the new line are expected to be ,500,000 would need to be purchased. This erminal) value of $400,000. For tax purposes, for Mendoza is 14% (after tax), and that the . Finally, assume that the new business line
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ect operation. ermination). stment proposal. $4,125,000 $3,643,000 $482,000 $187,980 $294,020 $546,000
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$840,020 $37,000 $624,000 $661,000
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Exercise 1 Backgroun Assume th past three Mendoza w this decisio Required 1. Determin 2. Determin 3. Determin 4. Identify a
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5. Determin should be Solution 1. Relevan Incremen Net purch After-tax 2. Relevan Differenc Differenc Differenc
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Net differ 3. Determin 31 Decem 4. Irrelevan The origin sunk cost needed to which itse The origin machine- 5. Decision
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12-29: Determining Relevant Cash Flows--Asset-Replacement Decision nd hat the Mendoza Company is considering the replacement of a current machine, which ha years in the operations of the business. The anticipated purchase date for this new mach will either keep the existing machine, or replace the existing machine with a new model. P on are as follows: Purchase price of machine (including transportion, set-up expesnses, etc.) Useful life, in years (determined at time of acquisition) Estimated salvage value, end of 2017* Expected cash operating costs, per year: Variable (per unit produced/sold) Fixed costs (total) Estimated salvage (terminal) values: January 1, 2013 December 31, 2017 Net working capital committed, beginning of project (fully recovered at end of project) Incremental net working capital required if new machine is purchased on 01 Jan 2013 Expected annual volume of output/sales, 2013-2017 Tax rate (on both ordinary income and capital gains/losses) Assume further that Mendoza is subject to a 40% income tax, both for ordinary income a with the disposal of machinery, and that all cash flows occur at the end of the year, excep Also, assume that straight-line depreciation is used for tax purposes and that any tax ass machinery occurs at the same time as the related transaction. ne the relevant cash flow (after-tax) at time of purchase for the new machine (i.e., at time ne the relevant (after-tax) cash inflows each year of project operation (i.e., years 1 through ne the relevant (after-tax) cash inflow at the end of the project's life (i.e., at project disposa any irrelevant cost and revenue data associated with this asset-replacement decision * Note: these amounts are used for depreciation calculations.
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