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 1 operating cash flow.

A. 110,000

Explanation / Answer

Compute the year 1 cash flows:

Therefore, the correct answer is option B.

Particulars Amount($) Increase in revenue before tax 40000 Less: Depreciation 33000 Cash Flow before tax 7000 Tax @0.34 2380 Cash Flow after tax 4620 Add: Depreciation 33000 Cash Flow of year 1 37620

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