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Tinney​ & Smyth Inc. is considering the purchase of a new batch​ polymer-bonding machine for ...

Tinney​ & Smyth Inc. is considering the purchase of a new batch​ polymer-bonding machine for producing Crazy​ Rubber, a​ children's toy that is​ soft, pliable but also bouncy. The machine will increase EBITDA by $ 255,000 per year for the next two years. Assume that operating cash flows occur at the end of each year. The​ machine's purchase price is $ 300,000 and the salvage value at the end of two years is $ 78,000. The machine is classified as 3​-year property. To run the Crazy Rubber production line the company will need to purchase an inventory of polydimethylsiloxane and boric acid for a total cost of $ 14,000. What is the initial cash flow for the Crazy Rubber​ project? The initial cash flow is

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Answer #1

Initial Cash flow = Purchase Price of machine + Inventory Cost

= 300,000 + 14,000

= 314,000

Note this is an outflow, hence, the sign should be negative.

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