Question

ABC is looking at purchasing a new machine. The new machine installed cost is $60,000 and requires minimal increase in NWC (net working capital). It will be sold at the end of year 3 for an anticipated $5,000. Use MACRS 3 yr. (Remember to add the terminal cash flow in when calculating year 3 OCF) Anticipated cash savings prior to depreciation: Year 1$20,000, Year 2 $30,000, Year 3 $20,000 Calculate the operating cash flows for each year. Tax Rate is 40%

Answer 1

Time line		0	1	2	3
Cost of new machine		-60000
=Initial Investment outlay		-60000
3 years MACR rate			33.33%	44.45%	14.81%	7.41%
Profits			20000	30000	20000
-Depreciation	=Cost of machine*MACR%		-19998	-26670	-8886	4446	=Salvage Value
=Pretax cash flows			2	3330	11114
-taxes	=(Pretax cash flows)*(1-tax)		1.2	1998	6668.4
+Depreciation			19998	26670	8886
=after tax operating cash flow			19999.2	28668	15554.4
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)				3000
+Tax shield on salvage book value	=Salvage value * tax rate				1778.4
=Terminal year after tax cash flows					4778.4
Total Cash flow for the period		-60000	19999.2	28668	20332.8