A firm is considering the acquisition of a new machine. The base price is $85,00

Question

A firm is considering the acquisition of a new machine. The base price is $85,000 and it would cost $15,000 to install. The machine is MACRS 3 year class property and it will be sold after 3 years for $17,000. The machine would also require an increase in net working capital of $10,000. The machine is expected to increase before tax revenues by $40,000 per year. This firm is in a 34% marginal tax bracket. MACRS 3 year factors are 33%, 45%, 15%, and 7% for years 1 through 4 respectively. What is the initial (year 0) net cash outflow.

Explanation / Answer

The intial year net cash flow is the cost that is needed to start the project, such as buying new equipment or installation or shipping of the equipment.

It will also include increase in net working capital

Therefore, Intial net cash flow = Machince cost + Shipping and installation cost + change in net working capital.

Intial net cash flow = 85000 + 15000 + 10000

Intial net cash flow = 1,10,000

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