Purple Haze Machine Shop is considering a four-year project to improve its produ

Question

Purple Haze Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $542551 is estimated to result in $189712 in annual pretax cost savings. The machine is depreciated straight-line to zero over its five-year tax life, and it will have a salvage value at the end of the project of $156655. The shop's tax rate is 34 percent. What is the OCF (year 1)? (Round your final answer to the nearest dollar amount. Omit the "$" sign and commas in your response. For example, $123,456.78 should be entered as 123457.)

Explanation / Answer

Annual depreciation = (cost of asset – salvage value)/no. of years

                                        = (542551 -0)/5

                                         = 108,510.20

Depreciation tax shield = Depreciation x tax rate

                                                = 108,510.20 x 34%

                                                = 36,893.47

Year 1 OCF = pretax saving x (1- t) + depreciation tax shield

                       = 189,712 x (1-0.34) + 36,893.47

                       = 162103.39

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