Your company plans to produce a product for two more years and then to shut down production. You are considering replacing an old machine used in production with a new machine. The Old machine origina...
Your company plans to produce a product for two more years and then to shut down production. You are considering replacing an old machine used in production with a new machine. The Old machine originally cost $ 717 and was bought Three (3) years ago (i.e. it has depreciated for three years). It could be sold today for $ 255 or sold in two years for $ 162 . The New machine would cost $ 786 and could be sold in two years for $ 273 . The new machine is more efficient than the old machine and would reduce waste, and therefore the cost of materials, by $ 253 per year. Due to the lower waste, we could also have a one-time reduction in inventory of 30 . The firm's tax rate is 31 %. Both machines are in the 4 year MACRS class, with depreciation amounts of 15%, 45%, 33% and 7%. What are the Operating Cash Flows in the first year (Year 1) with the new machine?
Homework Answers
| year 1 | |
| savings in cost of material | 253 |
| less:Depreciation [786 * .15] | (117.9] |
| Income before tax | 135.1 |
|
less:tax [135.1 *.31 ] |
(41.881) |
| Net income | 93.219 |
| Add:depreciation | 117.8 |
| Operating cash flow | 211.019 (rounded to 211.02) |
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