Your company is contemplating the purchase of a large stamping machine. The mach

Question

Your company is contemplating the purchase of a large stamping machine. The machine will cost $180,000.

With additional transportation and installation costs of $5,000 and $10,000, respectively, the cost basis for

depreciation purposes is $195,000. Its MV at the end of ve years is estimated as $40,000. The IRS has

assured you that this machine will fall under a three-year MACRS class life category. The justications for

this machine include $40,000 savings per year in labor and $30,000 savings per year in reduced materials. The

before-tax MARR is 20% per year, and the effective income tax rate is 40%. The total before-tax cash ow in year ve

is most nearly (assuming you sell the machine at the end of year ve):

Explanation / Answer

In the fifth year, there will be a cash flow of $40000 in the form of savings in labor and $30,000 in the form of reduced materials. Another cash flow will be the market value when it is sold. There are no expenditure in that year. So the total before-tax cash ow in year ve is given by

= Revenue - expenditure + Market value

= $40000 + $30000 - $0 + $4000

= $110,000

Hence the before tax cash flow in 5th year is $110,000.

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