Your company plans to produce a product for two more years and then to shut down

Question

Your company plans to produce a product for two more years and then to shut down production. You are considering replacing an old machine used in production with a new machine. The Old machine originally cost $ 339 and was bought Three (3) years ago (i.e. it has depreciated for three years). It could be sold today for $ 72 or sold in two years for $ 23 . The New machine would cost $ 473 and could be sold in two years for $ 219 . The new machine is more efficient than the old machine and would reduce waste, and therefore the cost of materials, by $ 10 per year. Due to the lower waste, we could also have a one-time reduction in inventory of 15 . The firm's tax rate is 39 %. Both machines are in the 4 year MACRS class, with depreciation amounts of 33%, 45%, 15% and 7%. What are the Operating Cash Flows in the first year (Year 1) with the new machine

Explanation / Answer

Answer..

calculation of out flow cost of new machine 473 less; sales of old assets -72 loss: tax loss on sales of assets -69.81 331.19 calculation of inflow reduction in cost of material 10 reduction in cost of inventory 15 less; tax @45% -11.25 13.75

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