1) (6 points) Company Z is considering purchasing an automated machine which is
ID: 2595253 • Letter: 1
Question
1) (6 points) Company Z is considering purchasing an automated machine which is estimated to reduce expenses by $72,000 per year. The machine will have no effect on revenues but is expected to pay for itself from the cost savings. The machine costs $200,000 and will be depreciated on a MACRS (I have calculated the depreciation below). The machine is expected to be sold after 3 years for $45,000. The purchase of the machine would require an increase in net working capital of $5,500 at t-0, and the net operating working capital is expected to be recovered at t=3. Company Z's marginal tax rate is 35%. Fill in the following information. (You do not have to calculate NPV of the project) Year 0 Year 1 Year 2 Year 3 Operating Cash Flow Net Working Capital Capital Spending Prolect Income Statement Year 1 Year 3 Depreciation of Equipment Year 2 Year 1: 66,000 Year 2: 90,000 Year 3: 30,000 Year 4: 14,000Explanation / Answer
Year 0 Year 1 Year 2 Year 3 Operating cash flows 69900 90000 51000 Net Working capital -5500 5500 Capital spending -200000 34150 Projected Income statement Year 1 Year 2 Year 3 Cost savings 72000 72000 72000 Less : Depreciation 66000 90000 30000 Operating profit 6000 -18000 42000 Gain on sale of machine 34000 Net Income before taxes 6000 -18000 76000 Income taxes 2100 -6300 26600 Less : Taxes on carry forward & set off of losses 6300 Net income after taxes 3900 -18000 43100
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