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Grease Gougers International is considering replacing their existing grease gouging equipment with new equipment that has a technology that will not only be less costly to operate but will gouge more grease. The original equipment was purchased 5 years ago at a cost of $240,000 and is being depreciated using 8-year straight-line depreciation to zero. The original equipment can be sold for $70,000 today. The new equipment cost is $500,000, qualifies for the 3-year MACRS depreciation class and has a 3-year useful life. The applicable MACRS rates are 33%, 45%, 15% and 7%, respectively.
The new grease gouging equipment would increase revenues $40,000 annually and would decrease operating costs (other than depreciation) by $90,000 annually. At the end of the 3-year life of this replacement analysis, the old equipment has an estimated salvage value of zero and the new equipment's salvage value is expected to be $100,000. The company's tax rate is 40% and their WACC is 16%. Also, the company expects to have enough other taxable income to write off any losses that may occur as a result of the replacement project.
What is the year 1 operating cash flow for Grease Gouger's replacement project?
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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