Question

Calculating 'cash flows at the end'

Today (Year zero), a company plans to invest in a machine costing $450,000 and operate it for five years at which time it will be sold. For internal management accounting the company depreciates the machine over ten years. Tax rules state the machine is depreciated to zero over a twenty-year life.

The company has already agreed to sell the machine in five years’ time to an unrelated firm for $80,000. The company must also repay the bond's face value of $50,000 in year five.

In Year zero the machine will require a $15,000 increase in accounts receivable and inventory must increase by $50,000 compared to the current figure of $75,000. Assume the company tax rate is 30%.

What are the 'cash flows at the end'?

[Describe and list separately each cash flow and the corresponding amount on a new line, as in lecture and tutorial examples.]

Answer 1