Question

Mars Inc. is considering the purchase of a new machine that costs $80,000. This machine will reduce manufacturing costs by $20,000 annually. Mars will use the 3-year MACRS method (shown below) to depreciate the machine, and it expects to sell the machine at the end of its 5-year life for $10,000 salvage value. The firm expects to be able to reduce net operating working capital by $8,000 when the machine is installed, but the net working capital will return to the original level when the project is over (i.e., after 5 years). Mars's marginal tax rate is 40 percent, and it uses a 12 percent cost of capital to evaluate projects of this nature. Calculate the net cash flows of the project.

Be sure to put the cash flows in the order, i.e., CF0 in blank 1, CF1 in blank 2, CF2 in blank 3, etc. Cash outflows should be negative numbers, and round it to a whole number, e.g., -23,500.

Year	MACRS Percentage
1	0.33
2	0.45
3	0.15
4	0.07

BLANK 1:___________

BLANK 2:___________

BLANK 3___________

BLANK 4___________

BLANK 5____________

BLANK6_____________

Answer 1

Time line		0	1	2	3	4	5
Cost of new machine		-80000
Initial working capital		8000
=Initial Investment outlay		-72000
3 years MACR rate			33.00%	45.00%	15.00%	7.00%	0.00%
Savings			20000	20000	20000	20000	20000
-Depreciation	=Cost of machine*MACR%		-26400	-36000	-12000	-5600	0
=Pretax cash flows			-6400	-16000	8000	14400	20000
-taxes	=(Pretax cash flows)*(1-tax)		-3840	-9600	4800	8640	12000
+Depreciation			26400	36000	12000	5600	0
=after tax operating cash flow			22560	26400	16800	14240	12000
reversal of working capital							-8000
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)						6000
+Tax shield on salvage book value	=Salvage value * tax rate						0
=Terminal year after tax cash flows							-2000
Total Cash flow for the period		-72000	22560	26400	16800	14240	10000