Question

Geary Machine Shop is considering a 4-year project to improve its production efficiency. Buying a new machine press for $944,377 is estimated to result in $252,402 in annual pretax cost savings. The press falls in the MACRS five-year class (Refer to the MACRS table on page 277), and it will have a salvage value at the end of the project of $96,706. The press also requires an initial investment in spare parts inventory of $62,097, along with an additional $7,811 in inventory for each succeeding year of the project. If the shop's tax rate is 0.36 and its discount rate is 0.14, what is the total cash flow in year 4? (Do not round your intermediate calculations.)

(Make sure you enter the number with the appropriate +/- sign)

Answer 1

Time line		0	1	2	3	4
Cost of new machine		-944377
Initial working capital		-62097
=Initial Investment outlay		-1006474
5 years MACR rate			20.00%	32.00%	19.20%	11.52%
Savings			252402	252402	252402	252402
-Depreciation	=Cost of machine*MACR%		-188875.4	-302200.64	-181320.384	-108792.2304
-working capital to be maintained			-7811	-7811	-7811	-7811
=Pretax cash flows			55715.6	-57609.64	63270.616	135798.7696
-taxes	=(Pretax cash flows)*(1-tax)		35657.984	-36870.1696	40493.19424	86911.21254
+Depreciation			188875.4	302200.64	181320.384	108792.2304
=after tax operating cash flow			224533	265330	221814	195703
reversal of working capital						93341
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)					61891.84
+Tax shield on salvage book value	=Salvage value * tax rate					58747.80442
=Terminal year after tax cash flows						213980.64