Question

You are considering an investment in a new machine. The firm’s tax rate is 30%. Answer this question in Excel. Please highlight or circle your answers. The machine is expected to have the following:

Year	Change in revenue	Change in expenses	After tax increases in revenue	Change in depreciation	Tax benefit of depreciation	Change in net working capital	Change in capital spending	Incremental Cash Flow
0	0	0		0		+20,000	+100,000	=120,000
1	+20,000	+5,000	=10,500	15,000		+2,000	0
2	+20,000	+5,000	=10,500	15,000		+2,000	0
3	+20,000	+5,000	=17,500	15,000		-5,000	-15,000
4	+30,000	+5,000	=17,500	+20,000		+2,000	0
5	+30,000	+5,000	=17,500	+20,000		-21,000	-20,000

a) What is the expected incremental cash flow each year for this new machine?

b) Should you approve this project? Why or why not?

Answer 1