A firm is considering the acquisition of a new machine. The base price is $85,00

Question

A firm is considering the acquisition of a new machine. The base price is $85,000 and it would cost $15,000 to install. The machine is MACRS 3 year class property and it will be sold after 3 years for $17,000. The machine would also require an increase in net working capital of $10,000. The machine is expected to increase before tax revenues by $40,000 per year. This firm is in a 34% marginal tax bracket. MACRS 3 year factors are 33%, 45%, 15%, and 7% for years 1 through 4 respectively. What is the initial (year 0) net cash outflow

Explanation / Answer

Base Price of Machine = $85,000
Installation Cost = $15,000

Net New Price of Machine = Base Price of Machine + Installation Cost
Net New Price of Machine = $85,000 + $15,000
Net New Price of Machine = $100,000

Initial NWC Investment = $10,000

Initial Net Cash Outflow = Net New Price of Machine + Initial NWC Investment
Initial Net Cash Outflow = -$100,000 - $10,000
Initial Net Cash Outflow = -$110,000

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