(6 points) Company Z is considering purchasing an automated machine which is est

Question

(6 points) Company Z is considering purchasing an automated machine which is estimated to reduce expenses by $72,000 per year. The machine will have no effect on revenues but is expected to pay for itself from the cost savings. The machine costs $200,000 and will be depreciated on a MACRS (I have calculated the depreciation below). The machine is expected to be sold after 3 years for $45,000. The purchase of the machine would require an increase in net working capital of $5,500 at t-0, and the net operating working capital is expected to be recovered at t-3. Company Z's marginal tax rate is 35%. FW in the following information. (You do not have to calculate NPV of the project) 1) Year 0 Year 1 Year 2 Year 3 Operating Cash Flow Net Working Capital Capital Spending Project Income Statement Year 1 Depreciation of Equipment Year 3 Year 2 Year 1: 66,000 Year 2: 90,000 Year 3: 30,000 Year 4: 14,000

Explanation / Answer

cash inflows shown as positive numbers, outflows shown as negative numbers above.

supporting workings:

Year 0 Year 1 Year 2 Year 3 Operating cash flow 69900 78300 57300 Net working capital -5500 5500 Capital spending -200000 34150

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