Question

Mars Inc. is considering the purchase of a new machine that costs $60,000. This machine will reduce manufacturing costs by $5,000 annually. Mars will use the MACRS accelerated method (shown below) to depreciate the machine, and it expects to sell the machine at the end of its 5-year life for $10,000. The firm expects to be able to reduce net operating working capital by $15,000 when the machine is installed, but the net working capital will return to the original level when the project is over (i.e., after 5 years). Mars's marginal tax rate is 40 percent, and it uses a 12 percent cost of capital to evaluate projects of this nature. Calculate the net cash flows of the project. Be sure to put the cash flows in the order, i.e., CF0 in box 1, CF1 in box 2, CF2 in box 3, etc. Cash outflows should be negative numbers, e.g., -23,500.

Year	MACRS Percentage
1	0.20
2	0.32
3	0.19
4	0.12
5	0.11
6	0.06

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Answer 1

c3 X fic | A B C Depreciatio 1 Year Net savings 2 0 3. 1 $ 2 $ 3 $ 4 $ 5 $ 5 =60000*0.2 D E F G H I J к Net Net Depreciati Operating working After-tax cash PBT Tax@40% income on cash flows capital Investment flows $ 15,000 $ -60,000 $ -45,000 -7,000 $ -2,800 $ -4,200 $ 12,000 $ 7,800 $ 7,800 -14,200 $ 5,680 $ -8,520 $ 19,200 $ 10,680 $ 10,680 -6,400 $ -2,560 $ -3,840 $ 11,400 $ 7,560 $ 7,560 -2,200 $ -880 $ -1,320 $ 7,200 $ 5,880 $ 5,880 -1,600 $ -640 $ -960 $ 6,600 $ 5,640 $-15,000 $ 7,440 $ -1,920 5,000 $ 12,000 $ 5,000 $ 19,200 $ 5,000 $ 11,400 $ 5,000 $ 7,200 $ 5,000 $ 6,600 $ Asset cost $ 60,000 Less: Depreciation charged $ 56,400 WDV of machine at the time of sale $ 3,600 Sale value of machine $ 10,000 Profit/(Loss) on sale $ 6,400 Less: Tax @40% $ 2,560 After tax cash flows from sale of asset $ 7,440

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