Macro Incorporated is the manufacturer of mini-excavators and is considering pro
ID: 2791075 • Letter: M
Question
Macro Incorporated is the manufacturer of mini-excavators and is considering producing a new line of equipment in an effort to increase its market share. The new production line will cost $2, 550,000 for manufacturing the parts and an additional $630,000 is needed for installation. The equipment falls into the MACRS 3-yr class, and would be sold after four years for $600,000.
The equipment line will generate additional annual revenues of $950,000 in year 1, and $1,250,000 in the following years until the sale of the equipment. The project will attract additional annual operating expenses of $600,000. An inventory investment of $253,000 is required during the life of the project. Macro is in the 20 percent tax bracket, and its existing cost of capital is 6 percent.
A. Calculate the annual after-tax operating cash flow for Years 1 - 4. (Please pay speacial attention to year 4- I need correct answer especially for this year especially).
Explanation / Answer
Net Cashflows post taxes = Cash Inflows- Cash Outflows - Income Tax
Income Tax = Net Income * Tax rate
Net Income = Cash Inflow - Cash Outflow - non-cash expenses(depreciation)
therefore Net Cashflows post taxes = (Cash inflow - Cash Outflow -Depreciation) * (1-tax rate) + Depreciation +After tax salavge value
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3 year MACRS table (available online)
After tax salvage value of machine = Salvage value - (Salvage value - Undepreciated book value) * tax rate
= $600000 - ($600000 - 0 )* 0.20 = $600000 * 0.8 = $4,80,000
Undepreciated book value will be = 0
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Initial investment = $3180000
Answer is in 10th row of the table
Year Depreciation rate 1 33.33% 2 44.45% 3 14.81% 4 7.41%Related Questions
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