This exercise parallels the machine-purchase decision for theMendoza Company that is discussed in the body of the chapter.Assume that Mendoza is exploring whether to enter a complementaryline of business. The existing business line generates annual cashrevenues of approximately $4,350,000 and cash expenses of$3,675,000, one-third of which are labor costs. The current levelof investment in this existing division is $12,800,000. (Sales andcosts of this division are not affected by the investment decisionregarding the complementary line.)
  
Mendoza estimates that incremental (noncash) net working capital of$34,000 will be needed to support the new business line. Noadditional facilities-level costs would be needed to support thenew line—there is currently sufficient excess capacity. However,the new line would require additional cash expenses (overheadcosts) of $434,000 per year. Raw materials costs associated withthe new line are expected to be $1,360,000 per year, while thetotal labor cost is expected to double.
  
The CFO of the company estimates that new machinery costing$3,700,000 would need to be purchased. This machinery has asix-year useful life and an estimated salvage (terminal) value of$592,000. For tax purposes, assume that the Mendoza Company woulduse the straight-line method (with estimated salvage valueconsidered in the calculation).

Assume, further, that the weighted-average cost of capital (WACC)for Mendoza is 14% (after-tax) and that the combined (federal andstate) income tax rate is 45%. Finally, assume that the newbusiness line is expected to generate annual cash revenue of$3,975,000.