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ABC is looking at purchasing a new machine. The new machine installed cost is $60,000 and...

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%

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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

jeff jeffy answered 10 months ago
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