Question

Thornley Machines is considering a 3-year project with an initial cost of $618,000. The project will not directly produce any sales but will reduce operating costs by $265,000 a year (i.e., Sales –Costs = 265,000). The equipment is depreciated according to the MACRS 3-year class. At the end of the project the equipment will be sold for an estimated $60,000. The tax rate is 34%. The project will require $23,000 in extra inventory for spare parts and accessories.

Find (remembering to set up the depreciation schedule for the fixed asset first--on your personal worksheet -- not on the exam)

(i)The project’s time 0 cash flow,

(ii)The project’s operating cash flow for year 1.

(iii) The total (non-operating, or terminal) cash flow for year 3.

Answer 1