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 $ 873 and was bought Three (3) years ago (i.e. it has depreciated for three years). It could be sold today for $ 285 or sold in two years for $ 148 . The New machine would cost $ 978 and could be sold in two years for $ 365 . The new machine is more efficient than the old machine and would reduce waste, and therefore the cost of materials, by $ 154 per year. Due to the lower waste, we could also have a one-time reduction in inventory of 22 . The firm's tax rate is 35 %. 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?

Explanation / Answer

First year operating cash flow = (reduction-depreciation per year)*(1-tax rate)+depreciation per year*(tax rate)

=(154-873*0.15)*(1-0.35)+873*.15*.35

=60.815

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