The Cosmo K Manufacturing Group currently has sales of $1,400,000 per year. It i

Question

The Cosmo K Manufacturing Group currently has sales of $1,400,000 per year. It is considering the addition of a new office machine, which will not result in any new sales but will save the company $105,500 before taxes per year over its 5-year useful life. The machine will cost $300,000 plus another $12,000 for installation. The new asset will be depreciated using a a modified accelerated cost recovery system (MACRS) 5-year class life. It will be sold for $25,000 at the end of 5 years. Additional inventory of $11,000 will be required for parts and maintenance of the new machine. The company evaluates all projects at this risk level using an 11.99% required rate of return. The tax rate is expected to be 35% for the next decade.

What is the total investment in the new machine at time = 0 (T = 0)?

What are the net cash flows in each of the 5 years of operation?

What are the terminal cash flows from the sale of the asset at the end of 5 years?

Explanation / Answer

Time line 0 1 2 3 4 5 Cost of equipment -300000 Installation cost -12000 Total investment in new machine -312000 Net working capital -11000 =Initial Investment outlay -323000 Savings 105500 105500 105500 105500 105500 MACR rate 20% 32% 19.20% 11.52% 12% 5.76% -Depreciation MACR Rate* total investment -62400 -99840 -59904 -35942.4 -37440 17971.2 =Salvage value = 43100 5660 45596 69557.6 68060 -taxes =(savings- depreciation)*(1-tax) 28015 3679 29637.4 45212.44 44239 +Depreciation 62400 99840 59904 35942.4 37440 =after tax operating cash flow 90415 103519 89541.4 81154.84 81679 Reversal of Net working capital 11000 Proceeds from sale of assets =selling price*(1 - tax rate) 39000 +Salvage book value * tax rate 6289.92 Terminal year non operating cash flows 56289.92 Total Cash flow for the period -323000 90415 103519 89541.4 81154.84 137968.9

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.