Question

Cute Name Beverages, Ltd (CNB) is looking into expanding production into Premium Red wine. The grapes will be sourced from local vineyards, so the main capital outlays for the new product will be a new bottling machine and a dozen large oak barrels. After 10 years, CNB expects that tastes will have moved on and production will cease. As consultants, your firm has been engaged by CNB to help analyse the potential new product. Your team has collected the following facts and grouped them into four areas: Revenue, Costs, Bottling Machine and Oak Barrels.

1. Revenue

• Based on market research, CNB projects annual sales at 3,500 cases per year for 10 years.

• Each case will be sold for $180.

• If the new Premium Red is launched, CNB projects that net revenue from their existing Premium Rose line

  will decrease by $15,000 per year.

2. Costs

• Variable costs of production are $45 per case for the projected 3,500 cases sold per year.

• Fixed costs are $50,000 per year

• If CNB launches the Premium Red, they will increase their box order with CustomBoxCo, reducing their per-

  unit box cost on other product lines. This is estimated to save $5,000 per year.

• CNB paid $3,000 for the market research report that estimated annual sales at 3,500 cases per year.

3. Bottling Machine

• The new Bottling Machine will cost $735,000.

• ATO regulations require depreciation over 15 years using the straight-line method.

• At the end of 10 years, the estimated value of the Bottling Machine is $250,000.

4. Oak Barrels

• The total cost of the required French Oak barrels is $300,000.

• ATO regulations require depreciation over 20 years using the straight-line method.

• At the end of 10 years, the estimated value of the Oak Barrels is $100,000.

What is the annual depreciation for the Bottling Machine?

What is the net after-tax cash flow from the sale of the Bottling Machine in year 10?

Answer 1