The Munsell Colour Company is considering the purchase of a new batch polymer-bo

Question

The Munsell Colour Company is considering the purchase of a new batch polymer-bonding machine for producing its number one line of crayons. Although the machine being considered will not produce any increase in sales revenues, it will result in the before tax reduction of labour costs by $200,000 per year. The machine has a purchase price of $250,000, and it would cost an additional $10,000 to install the machine. In addition, to operate this machine, inventory must be increased by $15,000 The machine is categorized as 10-year property. After 2 years it can be sold for $150.000. The tax rate is 34% and the cost of capital is 15% Operating expenses are expected to increase by 2.5%. What are the terminal year cash flows? MACRS Depreciation Rates 10 Year 10.00% 18.00% 14.40% Year 15-Year 5 00% 9 50% 855% OA. $170.139 OB, $155.139 OC. $147.912 ( D. $328,860 OE. $320.139

Explanation / Answer

The terminal year cash flows:

(Annual savings - annual depreciation)*(1-tax rate) + depreciation + after tax salvage value + release in inventory

= (200000-0.18*250000)*(1-0.34) + 0.18*250000 + 0.18*250000 + (150000 - (150000-0.28*250000)*0.34) + 15000

= 330100 - increase in operating cash flows (after tax)

= 330100-0.025*(increase in operating cash flows)*(1-0.34)

So, the answer can be calculated on the basis of that.

Assuming, it would be less, answer should be around D or E.

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