Question

Woodland Corporation purchased a printing machine three (3) years ago and is considering replacing it with a new one which is faster and easier to operate.  The old machine has been depreciated over 3 years using straight line depreciation. Its original installation cost was $15,000.  The old machine has been in use for 2 years, and it can be traded in for $3,500.    The new machine will be purchased $24,000 and it will also be depreciated over 3 years using the straight line method.  It is not expected to have a residual value.  Net working capital will decrease because supply levels can be reduced by $1,500.   Revenues will increase by $5,000 every year, it will result in laborsavings of $3,000 per year due to its greater speed.  Reducing training expenses are expected to save an additional $2,500 per year.  The firm is in the 20% tax bracket.

Required:

i. Calculate the operating cash flows from years 1 to 3.  

ii. What is the terminal year non‐operating cash flow?

Answer 1

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Answer:

New machine depreciation value = $24,000

Per year value = 24000/3 = 8000

EBITDA increase in every year = Savinds in training expense + revenue increase + labour savings = 5000 + 3000 + 2500 = 10500

OCF formula is EBITDA (1 - tax rate) + Depreciation * t = 105000*(1-0.2) + 8000*(0.20) = 10,000 every year for three years

b)

Terminal non-operating cash flows will be the Increase in working capital = -1500