392 PART 3 Long-Term Investment Decisions
WWWyear recovery period. The firm’s projected revenues and expenses (excluding
depreciation), if it acquires the machine, would be as follows:The new machine would result in an increased investment in net working capital
of $22,000. At the end of 5 years, the new machine could be sold to net $25,000
before taxes.The firm is subject to a 40% tax on both ordinary income and capital gains.
As noted, the company uses MACRS depreciation. (See Table 3.2 on page 100
for the applicable depreciation percentages.)Required
a. Calculate the initial investment associated with each of Clark Upholstery’s
alternatives.
b. Calculate the incremental operating cash inflows associated with each of
Clark’s alternatives. (Note:Be sure to consider the depreciation in year 6.)
c. Calculate the terminal cash flow at the end of year 5 associated with each of
Clark’s alternatives.
d. Use your findings in parts a, b,and cto depict on a time line the relevant cash
flows associated with each of Clark Upholstery’s alternatives.
e. Solely on the basis of your comparison of their relevant cash flows, which
alternative appears to be better? Why?WEB EXERCISE Go to the Web site http://www.reportgallery.com. Click on Reports, at the top of the
page, navigate to the listing for Intel Corp., and click on Annual Report. This
takes you to an investor relations page; select the most recent annual report.
Answer the following questions using information in various report sections,
such as Intel Facts and Figures, Financial Summary, Consolidated Balance
Sheets, and Consolidated Statements of Cash Flow. (These may change from
year to year and may be listed in the left navigation bar.)
- How much did Intel spend on capital expenditures for each of the past
5 years? - Did capital expenditures increase or decrease?
- Is Intel’s capital spending consistent or erratic?
Expenses
Year Revenue (excl. depreciation)1 $1,000,000 $764,500
2 1,175,000 839,800
3 1,300,000 914,900
4 1,425,000 989,900
5 1,550,000 998,900