Question

You are considering replacing the eddy current magnet that separates the aluminum from the non-metallic materials your recycling company processes. The current magnet is an older generation of technology and has experienced increasing numbers of mechanical breakdowns which interrupt the work flow. A new magnet has just come out on the market that is expected to be more efficient as well as having a larger capacity for processing materials. You estimate that the new magnet will allow increased production resulting in sales rising from an estimated 2 million pounds to 2.3 million pounds per year. In addition, the higher quality should increase the sale price of aluminum from 30¢ per pound to 34¢ per pound. Your operating costs are projected to increase from $630,000 to $740,000 per year. The new magnet costs $150,000 and will be depreciated over its three-year useful life using the MACRS schedule (33%, 45%, 15%, 7%) for 3-year assets. The new magnet is expected to be worth only $60,000 after three years. The old magnet was purchased two years ago for $200,000 and is also being depreciated using the 3-year MACRS schedule. Although the old magnet is anticipated to have a resale value of $25,000 three years from now, it can be sold today for $75,000. Additional working capital of $25,000 will be required initially, all of which will be recovered at the end of the third year. Your firm is in the 40% tax bracket. Calculate the incremental cash flows of this investment project for each year.  

Need help working out the problem. The answer is:

Net Cash Flows

Year 0 - (112,400)

Year 1 - 51,000

Year 2 - 64,600

Year 3 - 102,400

Answer 1