A firm wants to buy a widget making machine for $100,000. The machine will be de
ID: 2625008 • Letter: A
Question
A firm wants to buy a widget making machine for $100,000. The machine will be depreciated using 3-year MACRS (33%, 45%, 15%, 7%). After three years, the machine can be sold for $10,000. The machine can make 10,000 widgets per year. Each widget can be sold for $5 and costs $3 to make. The Tax Rate is 40% and the WACC is 10%.
Balance Sheet Effects |----------Depreciation Expenses-------------|
Today Year 1 Year 2 Year 3 End
1. Buy New Assets
Income Statement Effects Year 1 Year 2 Year 3
Net Sales
- Net COGS
- Net Depreciation
- Net Fixed Costs
= Net OEBT
- Net Taxes
= Net OEAT
+ Net Depreciation
= Net Operating CF
30. What is the Operating Cash Flow in year two for this project?
31. What is the after tax salvage value of selling the new machinery in three years?
Explanation / Answer
30. 10,000*(5-3)(1-.40) +100,000*.45*.40= 30,000
31 10,000- (10,000-5,000)*.40= 8,000
(Asset will be depreciated 95% to 5,000 so gain on sale will be 5,000 Taxes will be 5,000*,4=2,000 so gain wll be 10,000-2,000=8,000.)
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