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 labor savings 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. i

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

Answer 1