Question

Cobra Golf Co. is considering a proposal to replace an existing casting machine for producing a new line of low quality golf clubs. The machine is expected to have a four year useful life and will be depreciated according to 3 year MACRS (0.25, 0.38, 0.37). The machine will cost the company $100,000 plus an installation cost of $30,000. Expanding the product line will increase the inventories by $10,000 initially. Projected EBT is $50,000 per year for next 4 years. Assume a marginal tax rate of 40% and cost of capital of 10%.

What is the CF at time 0,1,2,3,4?

Answer 1

Time line		0	1	2	3	4
Cost of new machine		-130000
=Initial Investment outlay		-130000
Profits			50000	50000	50000	50000
-Depreciation			-32500	-49400	-48100	0
=Pretax cash flows			17500	600	1900	50000
-taxes	=(Pretax cash flows)*(1-tax)	10500	360	1140	30000
+Depreciation			32500	49400	48100	0
=after tax operating cash flow			43000	49760	49240	30000