Decision regarding purchase of new machine
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The Taylor Mountain Uranium Company currently has annual cash revenues of $1,200,000 and annual cash expenses of $700,000. Depreciation amounts to $200,000 per year. These figures are expected to remain constant for the foreseeable future (at least 15 years). The firm's marginal tax rate is 40%.
A new high-speed processing unit costing $1,200,000 is being considered as a potential investment designed to increase the firm's output capacity. This piece of equipment will have an estimated usable life of 10 years and a $0 estimated salvage value. If the processing unit is bought, Taylor's annual cash revenues are expected to increase to $1,600,000, and annual cash expenses will increase to $900,000. Annual depreciation will increase to $320,000.
Compute the firm's annual net cash flows (NCF) for capital budgeting purposes for the next 10 years, assuming that the new processing unit is purchased.
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Solution Summary
The solution contains the computation of annual cash inflow from present machine and from the new machine to decide about the purchase or otherwise of new machine.
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