Company Inc is considering a new lightbulb manufacturing macine that would cost

Question

Company Inc is considering a new lightbulb manufacturing macine that would cost $100,000 to buy and an addition $5,000 to Install. Company Inc would have to maintain a parts inventory as net working capital during the life of the machine that could be sold at the end machines life. The machine would be depreciated to $15,000 over its 3 year life and the would be sold for $45,000. The machine is expected to save $35,000 , $45,000 , and $55,000 in years 1, 2 and 3 respectively. If Company Inc has a 30% marginal tax rate what are the initial cash flow in each years cash flow from the project.

Explanation / Answer

initial investment = 100000 + 5000 = 105000

depriciation per year = 100000-15000/3 = 28333.33

operating cash flow year 1 = (35000 - 28333.33) * (1-0.30) + 28333.33 * 0.3 =13166.67

operating cash flow year 2 = (45000 - 28333.33) * (1-0.30) + 28333.33 * 0.3 =20166.67

operating cash flow year 3 = (55000 - 28333.34) * (1-0.30) + 28333.34 * 0.3 + 45000 * (1-0.3) =58666.64

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