Question

Ella Inc. is considering purchasing a new milling machine. The new machine costs $289,083, plus installation fees of $14,027 and will generate revenue of $3,199,540 per year and cost of good sold of $1,706,517 over its 7-year life. The machine will be depreciated on a straight-line basis over its 7-year life to an estimated salvage value of 0. Mystic’s marginal tax rate is 0%. Mystic will require $31,801 in NWC if the machine is purchased. Determine the annual operating cash flow in if the machine is purchased. round your answer to two decimals

Answer 1

We can calculate the Operating Cash Flows if the machine is purchased as follows

Total Revenue generated per year = $ 3,199,540

Cost of goods sold = $ 1,706,517

Tax rate = 0%

Depreciation on machine = Cost of machine / estimated life

= ( 289,083 + 14027 ) / 7

= 303,110 / 7

= $ 43,301

Working Capital requirement = $ 31,801

Annual operating cash flow = Total Revenue - Cost of goods sold - Changes in working capital requirement

= 3,199,540 - 1,706,517 - 31,801

= $ 1,461,222

So, the Annual Operating Cash flows come out to be $ 1,461,222. Also the tax rate is 0% , so there is no tax expense.

Also, depreciation expense is a non cash expense, so it is not deducted in calculating the operating cash flows during the year because we have the total revenue given and all other operating expenses are deducted from total revenue except depreciation.