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 $ 903 and was bought Three (3) years ago (i.e. it has depreciated for three years). It could be sold today for $ 252 or sold in two years for $ 64 . The New machine would cost $ 847 and could be sold in two years for $ 331 . The new machine is more efficient than the old machine and would reduce waste, and therefore the cost of materials, by $ 180 per year. Due to the lower waste, we could also have a one-time reduction in inventory of 25 . The firm's tax rate is 37 %. Both machines are in the 4 year MACRS class, with depreciation amounts of 15%, 45%, 33% and 7%. What are the Operating Cash Flows in the first year (Year 1) with the new machine? Show your answer to the nearest $.01 Do not use the $ symbol in your answer.

Explanation / Answer

Operating Cash flow in the first year with the new machine Reduction in Cost of material      180.00 (-) Depreciation ($847 * 15%)      127.05 Net Increase in Income before tax         52.95 (-) Tax @ 37%         19.59 Net Increase in Income after tax         33.36 (+) Depreciation      127.00 (+) Reduction in Inventory         25.00 Operating Cash flow      185.36

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