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 year 3 operating cash flow.

A. 110,000

Explanation / Answer

Assumed discount rate of 10 %answer c.31500

Discount 10% Year 0 1 2 3 Initial cost+installation -100000 Networking capital -10000 Revenues 40000 40000 40000 17000 salvage value Net CF -110000 40000 40000 57000 0 28050 38250 12750 Tax benefit 0 4063 595 15045 POST TAX@34% -110000 35937 39405 41955 tax exemption DCF -110000 32670 32566.1157 31521.4125

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