DEF company is considering purchasing a new rubber extrusion line that produces rolling bands, flanks, and other products used in the process of tire manufacturing. This line will replace the existing...


DEF company is considering purchasing a new rubber extrusion line that produces<br>rolling bands, flanks, and other products used in the process of tire manufacturing. This<br>line will replace the existing one, which was purchased 4 years ago for $200,000, at an<br>installation cost of $50,000; it was depreciated under straight-line anmortization, and<br>with 4 years ofusable life remaining. The new line is more expensive (it costs $800,000<br>and does not have any additional installation costs), but at the same time requires an<br>increase in accounts receivable by $800,000, inventories by $200,000 and accounts<br>payable by $500,000. DEF company can sell the existing line for $150,000 without<br>incurring any additional costs.<br>In addition, suppose the new rubber extrusion line is amortized for 5 years, with the<br>following methods: 20% in year 1, 30% in year 2, 15% in year 3, 10% in year 4 and<br>5% in year 5.<br>At the end of 5 years, the existing line would have a market value of zero; the new line<br>would be sold to net $100,000 after removal and clean-up costs and before tax. The<br>firm is subject to 24% tax rate. The following table shows the estimated eamings before<br>interest, tax, depreciation, and amortization over the 5 years for both the new and the<br>existing line.<br>Eamings before interest, taxes, depreciation, and amortization<br>Existing line<br>$280,000<br>Year<br>Alternative new line<br>1<br>$250,000<br>2<br>250,000<br>250,000<br>3.<br>250,000<br>220,000<br>4<br>250,000<br>180,000<br>250,000<br>150,000<br>

Extracted text: DEF company is considering purchasing a new rubber extrusion line that produces rolling bands, flanks, and other products used in the process of tire manufacturing. This line will replace the existing one, which was purchased 4 years ago for $200,000, at an installation cost of $50,000; it was depreciated under straight-line anmortization, and with 4 years ofusable life remaining. The new line is more expensive (it costs $800,000 and does not have any additional installation costs), but at the same time requires an increase in accounts receivable by $800,000, inventories by $200,000 and accounts payable by $500,000. DEF company can sell the existing line for $150,000 without incurring any additional costs. In addition, suppose the new rubber extrusion line is amortized for 5 years, with the following methods: 20% in year 1, 30% in year 2, 15% in year 3, 10% in year 4 and 5% in year 5. At the end of 5 years, the existing line would have a market value of zero; the new line would be sold to net $100,000 after removal and clean-up costs and before tax. The firm is subject to 24% tax rate. The following table shows the estimated eamings before interest, tax, depreciation, and amortization over the 5 years for both the new and the existing line. Eamings before interest, taxes, depreciation, and amortization Existing line $280,000 Year Alternative new line 1 $250,000 2 250,000 250,000 3. 250,000 220,000 4 250,000 180,000 250,000 150,000
i.<br>Compute the initial investment associated with the alternative line.<br>i.<br>Compute the incremental operating cash flows associated with the alternative line<br>replacement.<br>

Extracted text: i. Compute the initial investment associated with the alternative line. i. Compute the incremental operating cash flows associated with the alternative line replacement.
Jun 05, 2022
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