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Shark Attack, Inc. must analyze the feasibility of a new piece of equipment that has an estimated useful life of 8 years, and the firm would like your help to make this decision. The firm plans to depreciate the equipment to a zero book value using SSLD. The purchase price of the equipment is $500,000 and it will cost another 10 percent of this price to ship and properly install. In addition, to safely operate the equipment, workers will require an extensive training session that will cost nearly $8,000. The firm has estimated that to begin using the machine, it will need to invest $70,000 in inventories. At the same time accounts payable will increase by $35,000. At the end of its life, Baby Blue hopes to sell the machine to a smaller competitor for $112,000.

The machine is expected revenues attributable to the new machine to be $375,000 each year before tax, but sales of one of the firm's existing products will decline by $50,000 per year before tax. In addition, cash operating expenses related to the new production process are expected to reach 38 percent of sales annually. Shark requires an 18 percent return for this type of project, and its marginal tax rate is 40%. What are the after-tax cash flows associated with this proposed project?

A) The initial outlay?

B) OCFs in years 1-7?

C) Terminal year cash flows in year 8—separated into operating and non-operating after-tax flows?

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Sixta Kovacek
Sixta KovacekLv2
28 Sep 2019

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ou should show your cash flows using the steps and approach used by me in class.
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useful life of 8 years, and the firm would like your help to make this decision. The firm plans to depreciatethe equipment to a zero book value using SSLD. The purchase price of the equipment is $500,000 and it willcost another 10 percent of this price to ship and properly install. In addition, to safely operate theequipment, workers will require an extensive training session that will cost nearly $8,000. The firm hasestimated that to begin using the machine, it will need to invest $70,000 in inventories. At the same timeaccounts payable will increase by $35,000. At the end of its life, Baby Blue hopes to sell the machine to a

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The machine is expected revenues attributable to the new machine to be $375,000 each year before tax, butsales of one of the firm's existing products will decline by $50,000 per year before tax. In addition, cashoperating expenses related to the new production process are expected to reach 38 percent of salesannually. Shark requires an 18 percent return for this type of project, and its marginal tax rate is 40%. Whatare the after-tax cash flows associated with this proposed project?
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The company faces a corporate tax rate of 35%, and you estimated that the discount rate which should be used for this project is 10% per year.

What should the company do?

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