Assignment 2: Estimating Cash Flows
Assume that your company is considering the replacement of an automated milling machine with one of the new machines offered by

three different manufacturers. Each of the three machines under consideration is expected to have an economic life of five years

and will result in greater daily production capacity and therefore increased sales volume. The increased volume will require an

increase in working capital during the first year to a level that will remain constant until the end of the five years. The

decision of which specific machine to select will depend on a net present value analysis. The old machine has reached the end of

its estimated useful life and can be sold at the salvage value that was projected when the machine was first installed.
Listed below are factors that may be essential for inclusion when estimating project cash flows. The factors may be required to

correctly calculate either the initial investment, the operating cash flows, or the terminal value that would be analyzed to

determine the net present value of the project. It is also possible that certain factors could be used in more than one of the

three categories of cash flow. Another possibility is that the factor listed is not relevant to cash flow estimation for this

specific scenario.
Your task is to identify whether the factor would be included in the calculation for the initial investment, or the operating

cash flow, or the terminal value, or is not relevant to this decision. You must also explain whether failure to appropriately

include the factor in the calculation would result in overstating or understating the net present value of the project.
FACTORS Purchase price of capital asset Incremental annual depreciation expense Total company sales revenue Cash realized from

sale of the old machine at its estimated salvage value Interest on the loan used to finance the asset purchase Total annual

depreciation expense Increase in working capital Decrease in working capital Total net income before tax Incremental net income

before tax Marginal income tax rate Investment tax credit Cost of shipping and installing the new equipment
Directions and Grading Criteria
To complete this assignment, you are to develop a Powerpoint presentation. You should create 1-3 slides that identify the factors

used to determine the initial investment, 2-5 slides that identify the factors used to determine the operating cash flow

estimates, and 1-3 slides that identify the factors used to determine the terminal value estimate. You must also indicate on the

slides whether failure to appropriately include the factor in the calculation would result in overstating or understating the net

present value of the project. Additional explanations or comments should appear in the speaker notes for each slide. APA

standards for writing style must be applied to the speaker notes. Factors that are not relevant to the NPV calculation should not

be included on any slide.

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