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The Doraville Machinery Company: product line

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The Doraville Machinery Company is planning to expand its current spindle product line.

The required machinery would cost $520,000.
The building that will house the new production facility would cost $1.5 million.
The land would cost $350,000. Working capital of $250,000 would be required by the start of year 1 and all of the working capital will be recovered.
The product is expected to result in additional sales of $775,000 per year for 10 years, at which time the land can be sold for $500,000, the building for $800,000, and the equipment for $50,000.
The annual disbursements for labor, materials, and all other expenses are estimated to be $465,000.
The firm's income tax rate is 40%, and any capital gains will be taxed at 35%.
The building will be depreciated according to a 39-year property class. The manufacturing facility will be classified as a seven-year MACRS.
The firm's MARR is known to be 15% after taxes.

Determine the projected net after-tax cash flows from this investment. Is the expansion justified?  A template for the solution is below. What is your decision - Accept or no, and explain.

Timespan 10 years
Additional Sales $775,000
COGS $465,000
Determine the projected net after-tax cash flows from this investment. Is the expansion justified?  A template for the solution is attached. Income Tax= 40%
MARR= 15%
Purchase Salvage
Equipment Values $520,000 $50,000 In year 10
Building Values= $1,500,000 $800,000 In year 10
Land Values $350,000 $500,000 In year 10
Capital Gains Tax= 35%
Working Capital= $250,000
1 2 3 4 5 6 7 8 9 10
MACRS - Building 39 2.4573% 2.5641% 2.5641% 2.5641% 2.5641% 2.5641% 2.5641% 2.5641% 2.5641% 2.4573%
Depreciation $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Book Value $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
MACRS - Machinery 7 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93% 4.46%
Depreciation $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Book Value $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Income Statement
0 1 2 3 4 5 6 7 8 9 10
Revenues $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Expenses
Production cost $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Depreciation:
Building $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Machinery $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Taxable Income $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Income Taxes (40%) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Net Income $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Cash Flow Statement
Operating Activities:
Net Income $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Depreciation $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Investment Activities
Land $0 $0
Building $0 $0
Machinery $0 $0
Tax on gains
Land $0
Building $0
Machinery $0
Working Capital $0 $0

Net Cash Flow $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

PW(15%) $0

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Solution Summary

Your tutorial is attached. Click in cells to see calculations. The gains and losses are calculated at salvage value less book value.

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