Question

Geary Machine Shop is considering a 4-year project to improve its production efficiency. Buying a new machine press for $510,621 is estimated to result in $161,346 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 $119,530. The press also requires an initial investment in spare parts inventory of $57,367, along with an additional $8,489 in inventory for each succeeding year of the project. If the shop's tax rate is 0.35 and its discount rate is 0.1, 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		-510621
Initial working capital		-57367
=Initial Investment outlay		-567988
5 years MACR rate			20.00%	32.00%	19.20%	11.52%	17.28%
Savings			161346	161346	161346	161346
-Depreciation	=Cost of machine*MACR%		-102124.2	-163398.72	-98039.232	-58823.5392	88235.309	=Salvage Value
-working capital to be maintained			-8489	-8489	-8489	-8489
=Pretax cash flows			50732.8	-10541.72	54817.768	94033.4608
-taxes	=(Pretax cash flows)*(1-tax)		32976.32	-6852.118	35631.5492	61121.74952
+Depreciation			102124.2	163398.72	98039.232	58823.5392
=after tax operating cash flow			135100.52	156546.6	133670.78	119945.29
reversal of working capital						91323
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)					77694.5
+Tax shield on salvage book value	=Salvage value * tax rate					30882.35808
=Terminal year after tax cash flows						199899.86
Total Cash flow for the period		-567988	135100.52	156546.6	133670.78	319845.15

Year 4 cash flow =319845.15