Question

# XYZ Company is considering whether a project requiring the purchase of new equipment is worth investing....

XYZ Company is considering whether a project requiring the purchase of new equipment is worth investing. The cost of a new machine is \$340,000 including shipping and installation. The project will increase annual revenues by \$400,000 and annual costs by \$100,000. The machine will be depreciated via straight-line depreciation for three years to a salvage value of \$40,000. If the firm does this project, \$30,000 in net working capital will be required. What is the annual cash flow of this project in the second year if the tax rate is 40%? Round to the nearest penny. Do not include a dollar sign in your answer.

Cost of Machine = \$340,000
Salvage Value = \$40,000
Useful Life = 3 years

Annual Depreciation = (Cost of Machine - Salvage Value) / Useful Life
Annual Depreciation = (\$340,000 - \$40,000) / 3
Annual Depreciation = \$100,000

Annual Revenues = \$400,000
Annual Costs = \$100,000

Annual OCF = (Revenues - Costs) * (1 - tax) + tax * Depreciation
Annual OCF = (\$400,000 - \$100,000) * (1 - 0.40) + 0.40 * \$100,000
Annual OCF = \$300,000 * 0.60 + 0.40 * \$100,000
Annual OCF = \$220,000

Year 2:

Annual Cash Flow = Annual OCF
Annual Cash Flow = \$220,000