Question

A car currently in use was originally purchased 3 years ago for $40,000. The car is being depreciated under MACRS using a 5-year recovery period; it has 4 years of usable life remaining. The car can be sold today to net $42,000 after removal and cleanup costs. A new car, using a 3-year MACRS recovery period, can be purchased at a price of $140,000. It requires $10,000 to install the new car. If the new car is acquired, the firm will have an increase in net working capital of $20,000. The firm is subject to a 40% tax rate. This results in the firm having an initial investment of $140,160. The revenues and expenses (excluding depreciation and interest) associated with both cars are given in the table below:

	New Machine:		Old Machine:
Year:	Revenues:	Expenses:	Revenues:	Expenses:
1	$175,000	$55,000	$115,500	$45,500
2	$185,000	$55,000	$125,500	$50,500
3	$185,000	$55,000	$130,500	$47,000

Calculate the operating cash flows for years 1 through 4 associated with the new car

Calculate the operating cash flows for years 1 through 4 associated with the old car

Answer 1

	New Machine:
Year:	Revenues:	Expenses:	Depreciation	EBIT	Tax	Net Income	OCF
1	$175,000	$55,000	49995	$70,005	$28,002.00	$42,003.00	$91,998.00
2	$185,000	$55,000	66675	$63,325	$25,330.00	$37,995.00	$104,670.00
3	$185,000	$55,000	22215	$107,785	$43,114.00	$64,671.00	$86,886.00
4	0	0	11115	($11,115)	($4,446.00)	($6,669.00)	$4,446.00

	Old Machine:
Year:	Revenues:	Expenses:	Depreciation	EBIT	Tax	Net Income	OCF
1	$115,500	$45,500	4608	$65,392	$26,156.80	$39,235.20	$43,843.20
2	$125,500	$50,500	4608	$70,392	$28,156.80	$42,235.20	$46,843.20
3	$130,500	$47,000	2304	$81,196	$32,478.40	$48,717.60	$51,021.60
4	0	0	0	0	0	0	0

Workings