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.
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.