Question

Purple Haze Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $589,114 is estimated to result in $190,416 in annual pretax cost savings. The press falls in the MACRS five-year class, and it will have a salvage value at the end of the project of $109,288. The shop's tax rate is 29 percent. What is the OCF for year 4? (Round your final answer to the nearest dollar amount. Omit the "$" sign and commas in your response. For example, $123,456.78 should be entered as 123457.) Modified ACRS Depreciation Allowances (Table 10.7) Year Three-Year Five-Year Seven-Year 1 33.33% 20.00% 14.29% 2 44.45 32.00 24.49 3 14.81 19.20 17.49 4 7.41 11.52 12.49 5 11.52 8.93 6 5.76 8.92 7 8.93 8 4.46

Answer 1

	0	1	2	3	4
Pre-tax annual savings		$       1,90,416	$     1,90,416	$      1,90,416	$     1,90,416	Total Depn	Book Value
-Depreciation		$       1,17,823	$     1,88,516	$      1,13,110	$         67,866	$      4,87,315	$       1,01,799
=Incremental NOI		$          72,593	$           1,900	$          77,306	$     1,22,550
-Tax at 29%		$          21,052	$               551	$          22,419	$         35,540
=Incremental NOPAT		$          51,541	$           1,349	$          54,887	$         87,011
+Depreciation		$       1,17,823	$     1,88,516	$      1,13,110	$         67,866
-OCF		$       1,69,364	$     1,89,865	$      1,67,997	$     1,54,876
-Capital expenditure	$       5,89,114
+After tax salvage value = 109288-(109288-101799)*29% =					$     1,07,116
=FCF	$      -5,89,114	$       1,69,364	$     1,89,865	$      1,67,997	$     2,61,993
ANSWER:
OCF for year 4 =	$       1,54,876
FCF for year 4 =	$       2,61,993