A company is evaluating the proposed acquisition of a new production machine. Th

Question

A company is evaluating the proposed acquisition of a new production machine. The machine's base price is $200,000, and installation costs would amount to $28,000. An additional $10,000 in net working capital would be required at installation. The machine will be depreciated over 3 years to a zero salvage value. The machine would save the firm $110,000 per year in operating costs. The firm is planning to keep the machine in place for 3 years. At the end of the third year, the machine will be donated to a chairtable organization. The firm is profitable, has a required rate of return on investment projects of 12% and a marginal tax rate of 34%.

What is the incremental year 1 ATCF?

Explanation / Answer

Depreciation tax shield is 228,000/3= 76,000* .34= 25,840 After tax cost savings 110,000(1-.34)= 72,600 Total 1st year after tax cash flow 98,440.

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