Question

In: Finance

•Calculate the change in operating cash flow for each year using the following information: •The machine costs $1,000,000 and is depreciated using straight-line over five years.

•Calculate the change in operating cash flow for each year using the following information:

•The machine costs $1,000,000 and is depreciated using straight-line over five years.

•The machine will increase sales by $150,000 per year for five years.

•The tax rate is 40%.

•Working capital needs increase by $10,000 when the machine is placed in service and are reduced at the end of the life of the machine.

•There is no salvage value at the end of the five years.

Solutions

Expert Solution

Increase in revenue = $150000

 

Depreciation = (Cost-Salvage)/Useful life

                        = (1000000-0)/5

                       = 200000

 

Profit before taxes = 150000-200000

                                  = -50000

 

Less Tax = -50000*40%

                = -20000

The less tax is -20000

 

Net profit = -50000-(-20000) 

                   = -30000

The net profit is -30000.

 

Add back: depreciation = 200000

 

Operating Cash Flow = -30000+200000

                                      = $170000

 

The cash flow is $1,700,00.

Umair answered 2 years ago
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