A Corp. is trying to decide whether to invest to automate a production line. If

Question

A Corp. is trying to decide whether to invest to automate a production line. If the project is accepted, labor costs will decrease by $165,000 per year. However, other cash operating expenses will increase by $86,000 per year. The equipment will cost $260,000 and is depreciable over 10 years using simplified straight line to a zero salvage value. Crossroad will invest $10,000 in net working capital at installation. The firm has a marginal tax rate of 34%. Calculate the firm's annual cash flows associated with the new project.

Explanation / Answer

Incremental revenue =$165,000- $86,000=$79000 depreciation =$260,000/10=$260,00 Annual cash flows Year 1-10= ($79000-$260,00)*(1-34%) +$260,00 = $60,980 Cash Flow Year 0 = -$260,000-$10,000 =-270000

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