Question

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 $ 631 and was bought Three (3) years ago (i.e. it has depreciated for three years). It could be sold today for $ 326 or sold in two years for $ 242 . The New machine would cost $ 635 and could be sold in two years for $ 463 . The new machine is more efficient than the old machine and would reduce waste, and therefore the cost of materials, by $ 492 per year. Due to the lower waste, we could also have a one-time reduction in inventory of 92 . The firm's tax rate is 36 %. Both machines are in the 4 year MACRS class, use these rounded depreciation amounts of 15%, 45%, 33% and 7% in your calculation. What are the total Operating Cash Flows in the first year (Year 1) with the new machine? Enter your answer to the nearest $.01. Do not use $ or , in your answer. Use a - sign if the cash flows are negative.

Answer 1

Calcultion of Operating Cash flows for Year 1      
      
savings in costs   492.00  
Add: saving in Depreciation of old machine   44.17  
(631*7%)      
less: Depreciation on new machine   -95.25  
(635*15%)      
      
______________________________________________      
Incremental profit.   440.92  
less: tax @36%   -158.73  
______________________________________________      
Profit after tax   282.19  
add: Depreciation of new machine   95.25  
less: Depreciation of old Machine   -44.17  
______________________________________________      
Operating cash flows   333.27  
______________________________________________      
Total Operating Cash Flows in the first year (Year 1) with the new machine is   333.27  
      
Note : Depreciation is deducted for tax calculation only. It is added again because it does not result in cash outflow      
Depreciation expense on old Machine is saved, so added. on New Machine it is incurred, so deducted