Question

Mahya Corporation is considering the purchase of a high-speed lathe that has an invoice price of $300,000. The cost to ship the lathe to Mahya's factory is $50,000, and the existing facilities will require modifications that are expected to cost $50,000. The machine will be depreciated on a straight-line basis over its useful life of 10 years, assuming no salvage value. Mahya Corporation is planning on paying for the lathe using a line of credit at the bank that has an interest rate of 6 percent per year. The lathe is expected to increase production and sales. Sales are expected to increase by $150,000 per year.

$20,000 is needed for the additional networking capital. Expenses to operate the lathe are $25,000 per year. Mahya's marginal tax rate is 40%.

a.            Calculate the initial outlay required to fund this project.

b.            Calculate the incremental after-tax cash flow in year one of the project.

Answer 1

A). Initial cash outflow of the project is $420,000

Initial cash outflow = cost of new equipment + cost of modification + increase in Net working

1.cost of new equipment = invoice price of new equipment + cost of shipment

=$300,000 + $50,000

=$350,000

2. cost of modification = $50,000

3.increase in Net working capital = $20,000

initial cash outflow = ($350,000 + $50000 + $20,000) = $420,000

B.) Yearly operating Cash Flow is $89,000

Annual Sales	$150,000
operating costs	($25,000)
Depreciation ($350,000 / 10)	($35,000)
Earnings before tax	$90,000
Taxes (40%)	($36,000)
Earnings after tax	$54,000
Add Non-cash expenses(depreciation)	$35,000
Yearly operating Cash Flow	$89,000