Geary Machine Shop is considering a 4-year project to improve its production eff
ID: 2789547 • Letter: G
Question
Geary Machine Shop is considering a 4-year project to improve its production efficiency. Buying a new machine press for $650000 is estimated to result in $191000 in annual pretax cost savings. The press falls in the MACRS five-year class (Refer to the MACRS table on page 277), and it will have a salvage value at the end of the project of $113000. The press also requires an initial investment in spare parts inventory of $72000, along with an additional $7100 in inventory for each succeeding year of the project. If the shop's tax rate is 0.38 and its discount rate is 0.11, what is the total cash flow in year 4? (Do not round your intermediate calculations.) (Make sure you enter the number with the appropriate +/- sign)
Explanation / Answer
Pre-tax cost savings = 191,000. Savings after tax = 191,000*(1-0.38) = $118,420
Depreciation for the 4th year = 11.52%. Amount of depreciation = 650,000*11.52% = $74,880. Depreciation tax shield = depreciation*tax rate = 74,880*0.38 = $28,454.40
Operating cash flow in 4th year = savings after tax+depreciation tax shield = 118,420+28,454.4 = $146,874.40
Total cash flow in 4th year = operating cash flow in 4th year - changes in working capital
= 146,874.40 - 7,100
= $139,774.40
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