Question

You have been asked by the CEO of Gastric Anxiety Supplier (GAS) to evaluate the proposed acquisition of a new Standardized Test Templater (PowerPoint based) for the firm’s accounting area. A recently completed $100,000 marketing survey demonstrates a high demand for the product. The equipment’s basic price is $740,000 and it would cost another $220,000 to modify it for high altitude (Wasatch Mountain) use. The templater, which has a MACRS 3-year recovery period (recovery allowances of 33%, 45%, 15%, and 7% for years 1, 2, 3, and 4, respectively), would be sold after 3 years for $200,000. Use of the equipment would require a one-time increase in net working capital (spare parts inventory) of $75,000. The templater would have no effect on revenues, but it is expected to save the firm $440,000 per year in pre-tax operating costs, mainly labor. The firm’s marginal federal-plus-state tax rate is 40 percent.

What is the net operating cash flow in year 1? (The depreciable basis equals the purchase price plus the amount of the high altitude modifications.)

a	$436,800
b	$321,600
c	$390,720
d	$566,200

Answer 1

Particulars	Amount
Savings	$        440,000
Less: depreciation	$      (316,800)
PBT	$        123,200
Less: tax	$        (49,280)
PAT	$          73,920
Add: depreciation	$        316,800
CFAT	$        390,720

Answer is $390,720

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