The DeLeca Plastice Company is considering a machine that has a cost of $25,000.

Question

The DeLeca Plastice Company is considering a machine that has a cost of $25,000. The machine will permit an output expansion, so the incremental change to the current sales forecast for each year of production is estimated at $5,000 and the new machine's greater efficiency is expected to lower operating expenses by $3,000 per year. Usefull life of 5 years (depreciated-straight-line). Change in working capital of $3,000 per year. Tax rate is 40%. Cost of capital is 5%. Using the equation CF=Ebit (1-tax) +Dep+-change in Working Capital - Capital Expenditure:

1. Create a cash flow schedule

Explanation / Answer

cost=$25000

Production=5000/year

decrease in operating expense=3000/year

usseful life=5 years

r=5%

t=40%

Depriciation per year=25000/5=5000/year

CF1=(5000-5000+3000)*(1-0.4)+5000+3000=9800

CF2=(5000-5000+3000)*(1-0.4)+5000+3000=9800

CF3=(5000-5000+3000)*(1-0.4)+5000+3000=9800

CF4=(5000-5000+3000)*(1-0.4)+5000+3000=9800

CF5=(5000-5000+3000)*(1-0.4)+5000+3000=9800

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