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Edinaman Company (Edinaman) currently processes seafood with a unit purchased several years ago. The unit...

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Accounting

Edinaman Company (Edinaman) currently processes seafood with a unit purchased several years ago. The unit which originally cost $500,000, currently has a book value of $250,000. Edinaman is considering replacing the existing unit with a newer, more efficient one. The new unit will cost $700,000 and will require an additional $50,000 for delivery and installation and require Edinaman to increase initial net working capital (NWC) by $40,000. The new unit will be depreciated on a straight-line basis over 5 years to zero balance. Edinaman expects to sell the existing unit for $275,000. Edinamans marginal tax rate is 40%. If Edinaman purchases the new unit, its annual revenues are expected to increase by $100,000 (due to increased processing capacity) and its annual operating costs are expected to decrease by $20,000. Annual revenues and operating costs are expected to remain constant at this new level over the 5-year life of the project. After 5 years, the new unit will be completely depreciated and expected to be sold for $70,000.

How to I find the cash flow for the payback period?

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