Question

Jones Crusher Company is evaluating the proposed acquisition of a new machine. The machine will cost​ $190,000, and it will cost another​ $33,000 to modify it for special use by the firm. The machine falls into the MACRS 3minusyear ​class, and it will be sold after 3 years of use for​ $110,000. The machine will require an increase in net working capital of​ $9,000 and will have no effect on​ revenues, but is expected to save the firm​ $90,000 per year in​ before-tax operating​ costs, mainly labour. The​ company's marginal tax rate is​ 40%  What is the cash flow from the project for year​ 1? MACRS Depreciation Rates Year 1 the 3 year at 33.33 % year 2 the three year at 44.45 % year 1 the 5 year at 20 % year 2 the five year at 32 %

Answer 1

Answer :

Given that,

Saving from use of new machine = $ 90,000 per year

After tax savings = $ 90,000 ( 1 - tax rate )

= $ 90,000 ( 1 - 0.4 )

= $ 90,000 * 0.6

= $ 54,000

The machine falls into the MACRS 3 - year class,

Therefore, From the given data, depreciation in the first year = 33.33%

Cost of machine = Initial cost + Modification cost

= $190,000 + $33,000 = $ 223,000

Depreciation = $ 223,000 * 33.33% = 74,325.9

Depreciation tax shield = 74,325.9 * tax rate

= 74,325.9 * 0.40

= 29,730.36

Cash flow for year 1 = After-tax savings + Depreciation tax shield

= $ 54,000 + $ 29,730.36

Cash flow for year 1 = $ 83,730.36.