Question

Question 12 5 pts Elsinore Tech is considering the purchase of a new brewing machine to replace an existing one. The old machine was purchases 3 years ago at a cost of $30,000, and was being depreciated using straight-line depreciation over six years to a SV of 0. The current market value of the old machine is $20,000. The new machine falls into the MACRS 5-year class, has an estimated life of 5 years, it costs $100,000, and Tech plans to sell the machine at the end of the fifth year for $14,000. The new machine is expected to generate sales of $33,000 per year as well as saving the firm $2,000 per year in costs. In addition, the company will need to increase inventory by $10,000. The company's tax rate is 20 percent. (Numbers in parentheses are negative) 1 MACRS Class Year 3yr 5yr 7yr 33.33% 20.00% 14.29% 2 44.45% 32.00% 24.49% 3 14.81% 19.20% 17.49% 4 7.41% 11.52% 12.49% 5 11.52% 8.93% 6 5.76% 8.92% 7 8.93% 8 4.46% What would be the CFFA in time period 0 (t=0)? O ($91,000) O ($89,000) O ($94,000) O ($110,000) ($92,000)

Answer 1

Question 12

After tax Capital gain on old machine = (Selling price - Book value) * (1 - tax rate)

After tax Capital gain on old machine = (20000 - 0) * (1 - 20%)

After tax Capital gain on old machine = 16,000

Total inflow = 16,000

Purchase of new machine = 1,000,00

Additional inventory = 10,000

Total outflow = 1,10,000

Net cash flow = Inflow - Outflow

Net cash flow = 16,000 - 1,10,000

Net cash flow = - 94,000

Answer = (94,000)