Question

You have been asked by the president of your company to evaluate the proposed acquisition of a new milling machine. The machine's base price is $100,000, and it would cost another $20,000 to modify it for special use by your firm. The machine falls into the MACRS 3-year class (33.33%, 44.45%, 14.81%, and 7.41%). The machine would be sold in five years for $40,000. Use of the machine would require an increase in inventory of $5,000. The machine would have no effect on revenues, but it is expected to save the firm $45,000 per year in before-tax operating costs, mainly labor. This cost savings is only accurate within 5%. Six months ago a consultant was paid $3,000 to do a similar analysis and recommended that the machine be purchased. The firm's marginal tax rate is 40 percent and the cost of capital is 10 percent. Calculate the best case Net Cash Flow for year 2.

Answer 1

total Cost of machine			=	Cost +modification cost
			=	$100,000+$20,000
			=	$ 120,000.00
Since the machineis accurate in saving within 5% of $45,000.There are 3 scenario
	Base case saving		=	$45,000
	Wrost case scenario		=	$45000-5%*$45,000
			=	$42,750
	Best case scenario		=	$45,000+5% *$45,000
			=	$47,250
We are asked for net cashflow for best case scenario i.e. when saving is $47,250
Calculation of net cashflow for 2 nd year(best case scenario)
Saving in cost			=	$47,250
Less:depreciation($120,000*44.45%)			=	$53,340
benefit			=	($6,090)
Less:tax @40%			=	($2,436)
	Net beefit		=	($3,654)
Add:depreciation			=	$53,340
Net cashflow			=	$49,686
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