Question

The managers at Melody’s Movie theater are considering whether to upgrade their film projector. The upgraded projector costs $120,000 and will last for an estimated 6 years. It will be depreciated using the 3-year MACRS schedule. The upgraded projector will have an estimated $5,000 salvage value in year 7.

The upgraded projector will replace the theater’s existing projector. The existing projector was purchased 5 years ago, for $45,000. The old projector was also depreciated using the 3-year MACRS schedule. If the old projector is replaced, it will be sold immediately (in year 0) for $20,000. If the old projector is not replaced, it will last for 6 more years, and will be sold as scrap for $1,000 in year 7.

With the new projector, Melody’s Movie theater will be able to show enhanced 3D films, and they estimate that their annual sales will increase from $200,000 per year to $260,000 per year. Total operating costs associated with the business will not be affected by the new projector. Costs will be $110,000 per year regardless of projector.

Melody’s corporate tax rate is 30%.

a. Calculate the capital spending cash flows for the project.

b. Calculate the operating cash flows for years 1 to 6.

Answer 1

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