Question

A company is investigating the feasibility of purchasing a machine at the present time for $200,000. The following information pertains to the acquisition and use of the machine over the next five years:

In year one the cash revenues generated by the machine are expected to be $76,000, and these revenues are expected to increase by 6% year-over-year in each of the remaining 4 years that they own the machine.

The machine is expected to be sold at the end of 5 years for its estimated salvage value of $20,000.

Cash operating expenses directly associated with the generation of the annual revenues noted above are expected to be 65% of the revenues in year one, 64% of the revenues in year two, 63% of the revenues in year three, 62% of the revenues in year four, and 61% of the revenues in year five. In addition to the cash operating expenses, there will also be an annual depreciation expense of one-fifth of the cost (minus the salvage value) of the asset each year for the 5 years that the asset is held.

The machine will require a major overhaul costing $40,000 at the end of year three.

Prepare a cash flow spreadsheet to summarize the information above. For simplicity purposes you can ignore income taxes in this problem.

Answer 1

		Cash flow details of the feasibility of purchase of machinery
	Year	Cash revenue	Cash operating expenses (outflow)	Cash flow (outflow)/inflow related to asset	Total cash inflow/(outflow)
	0			(200,000)	(200,000)
	1	76,000	(49,400)		26,600
	2	80,560	(51,558)		29,002
	3	85,394	(53,798)	(40,000)	(8,404)
	4	90,517	(56,121)		34,397
	5	95,948	(58,528)	20,000	57,420
		Details of cash revenue generated by the Machine
	Year	Cash revenue	Details
	1	76,000	First year cash revenue
	2	80,560	Increase by 6% every year ( 76,000*106%)
	3	85,394	Increase by 6% every year ( 80,560*106%)
	4	90,517	Increase by 6% every year ( 85,394*106%)
	5	95,948	Increase by 6% every year ( 790,517*106%)
		Details of cash operating expenses
	Year	cash operating expenses	Details	Computation
	1	49,400	65% of revenue in the first year	=76,000*65%
	2	51,558	64% of revenue in the second year	=80,560*64%
	3	53,798	63% of revenue in the third year	=85,394*63%
	4	56,121	62% of revenue in the fourth year	=90,517*62%
	5	58,528	61% of revenue in the fifth year	=95,948*61%
		Details of cash floe related to machine
	Year	Cash flow (outflow)/inflow related to asset
	0	(200,000)
	1
	2
	3	(40,000)
	4
	5	20,000
		Details of depreciation
	Since in the question it has been mention to ignore the income tax therefore there will not be any impact for depreciation as we are not considering the tax benefit on depreciation and it is assumed that over hauling expenses are revenue in nature and will be charge off to profit and loss account
	Year	Depreciation on originally purchased asset
		=Cost of machine-Salvage value/life of the asset)
		=200,000-20,000)/5
	1	36,000
	2	36,000
	3	36,000
	4	36,000
	5	36,000