The Boundry is looking to purchase a new machine that has a purchase price of $1

Question

The Boundry is looking to purchase a new machine that has a purchase price of $1million, an MACRS class life of 5 years & an estimated sale price of $100,000. The new machine would be sold at the end of its useful life (at the end of year 3). The new machine is expected to decrease pre-tax Operating costs by $300,000 & increase revenues by $100,000 per year. The company will incur a one time increase in accounts receivable of $100,000 and inventory of $50,000, both which will be reduced at the end of the project.

The Company

Explanation / Answer

(a)   Calculate the tax savings from depreciation Depreciation Expense Year 1 Year 2 Year 3 Depreciation Expense $ 200,000.00 $ 320,000.00 $ 190,000.00 Tax Savings $    80,000.00 $ 128,000.00 $    76,000.00 b) Cash Flows             Year0 Year 1 Year 2 Year 3 Investment $ (1,000,000.00) After tax NOI $ 240,000.00 $ 240,000.00 $ 240,000.00 Tax Savings* $    80,000.00 $ 128,000.00 $    76,000.00 (from part a) Net Working Capital $     (150,000.00) $ 150,000.00 Net Salvage New Machine (including tax shield on it) $ 176,000.00 Net Cash Flow $ (1,150,000.00) $ 320,000.00 $ 368,000.00 $ 642,000.00 c) NPV of Project: $       (72,614.58) d) Do Not Purchase: Since NPV is negative do not purchase the new machine

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