Q5: Donald& Corporation is planning to add a new line of shoes that will require the acquisition of a new knitting and t

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Q5 Donald Corporation Is Planning To Add A New Line Of Shoes That Will Require The Acquisition Of A New Knitting And T 1 (100.45 KiB) Viewed 61 times

Q5: Donald& Corporation is planning to add a new line of shoes that will require the acquisition of a new knitting and tying machine. The machine will cost $1,000,000. It is classified as a 7-year MACRS asset and will be depreciated as such (MACRS year 1 depreciation rate is 14.29%). Interest costs associated with financing the equipment purchase are estimated to be $50,000 per year. The expected salvage value of the machine at the end of 10 year is $50,000. The decision to add the new line of shoes will require additional net working capital of $50,000 immediately, $25,000 at the end of year 1, and $10,000 at the end of year 2. Donald& expects to sell $300,000 worth of shoes during each of the 10 years of product life. Donald& expected the sales of the its other shoes to decline by $25,000 (in year 1) as a result of adding this new line of shoes. The lost sales level will remain constant at $25,000 over the 10-year life of the proposed project. The cost of producing and selling the shoes is estimated to be $50,000 per year. Donald& will realize savings of $5,000 each year because of lost sales on its other shoe lines. The marginal tax rate is 40%. a) Compute the initial outlay of the project. b) Compute the annual net cash flow for years 1 and 10 for this project.