Ralph's Bow Works (RBW) is planning to add a new line of bow ties that will require the acquisition of a new knitting and tying machine. The machine will cost $1.8 million. It is classified as a 7-year MACRS asset and will be depreciated as such. Interest costs associated with financing the equipment purchase are estimated to be $30,000 per year. The expected salvage value of the machine at the end of 15 years is $60,000. The decision to add the new line of bow ties will require additional net working capital of $45,000 immediately, $15,000 at the end of year 1, and $15,000 at the end of year 2. RBW expects to sell $280,000 worth of the bow ties during each of the 15 years of product life. RBW expects the sales of its other ties to decline by $15,000 (in year 1) as a result of adding this new line of ties. The lost sales level will remain constant at $15,000 over the 15-year life of the proposed project. The cost of producing and selling the ties is estimated to be $40,000 per year. RBW will realize savings of $6,000 each year because of lost sales on its other tie lines. The marginal tax rate is 40 percent. Compute the net cash flows for years 1 and 15 for this project.
Ralph's Bow Works (RBW) is planning to add a new line of bow ties that will require the acquisition of a new knitting and tying machine. The machine will cost $1.8 million. It is classified as a 7-year MACRS asset and will be
Compute the net cash flows for years 1 and 15 for this project.
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