Corriedale Ltd plan to introduce a new line of organically produced wool for textile production. The...

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Corriedale Ltd plan to introduce a new line of organicallyproduced wool for textile production. The new wool will generateincremental revenues of $57,000 per year for 8 years. Theincremental operating costs of producing the wool are projected tobe $20,000 per year. As a result of the new type of wool, demandfor Corriedale’s other products will decrease significantly.Corriedale estimate that EBITDA from other product lines will fallby $10,000 per year as customers switch to the organic wool. Theinitial capital expenditure to purchase wool processing equipmentwill be $70,000. Producing and distributing the new wool willincrease the working capital requirements of the business by $4,000for the life of the project. This investment in working capitalwill be fully recovered when the new wool is discontinued in 8years. For tax purposes, the wool processing equipment can bedepreciated on a straight-line basis to zero over 8 years.Corriedale expect that at the end of the 8 years the scrap value ofthe equipment will be $12,000. Corriedale face a corporate tax rateof 30%. Compute the net incremental cash flow for the new organicwool for its final year (only the final year is required).

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Initial capital expenditure 70000 Life of project 8 years Since the equipment will be depreciated to zero hence book value of equipment at end of 8 years 0 Annual straight line depreciation Initial capital expenditure Book value of equipment at end of 8 years Life of project 70000 0 8 See Answer

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Corriedale Ltd plan to introduce a new line of organicallyproduced wool for textile production. The new wool will generateincremental revenues of $57,000 per year for 8 years. Theincremental operating costs of producing the wool are projected tobe $20,000 per year. As a result of the new type of wool, demandfor Corriedale’s other products will decrease significantly.Corriedale estimate that EBITDA from other product lines will fallby $10,000 per year as customers switch to the organic wool. Theinitial capital expenditure to purchase wool processing equipmentwill be $70,000. Producing and distributing the new wool willincrease the working capital requirements of the business by $4,000for the life of the project. This investment in working capitalwill be fully recovered when the new wool is discontinued in 8years. For tax purposes, the wool processing equipment can bedepreciated on a straight-line basis to zero over 8 years.Corriedale expect that at the end of the 8 years the scrap value ofthe equipment will be $12,000. Corriedale face a corporate tax rateof 30%. Compute the net incremental cash flow for the new organicwool for its final year (only the final year is required).