Mars Inc. is considering the purchase of a new machine that costs $80,000. This

Question

Mars Inc. is considering the purchase of a new machine that costs $80,000. This machine will reduce manufacturing costs by $20,000 annually. Mars will use the 3-year MACRS method (shown below) to depreciate the machine, and it expects to sell the machine at the end of its 5-year life for $10,000 salvage value. The firm expects to be able to reduce net operating working capital by $8,000 when the machine is installed, but the net working capital will return to the original level when the project is over (i.e., after 5 years). Mars's marginal tax rate is 40 percent, and it uses a 12 percent cost of capital to evaluate projects of this nature. Calculate the net cash flows of the project. Cash outflows should be negative numbers, and round it to a whole number, e.g., -23,500.

Year MACRS % 1 0.33 2 0.45 3 0.15 4 0.07 5 0.11 6 0.06

Explanation / Answer

Answer: Intial outlay :

Cost = -$80000

Change in working capital= +8000

CF0 = -72000

Adjusted basis after 5 years is =$4800

Terminal cash flow:

Year MACRS Percentage Depreciation 1 0.33 26400 2 0.45 36000 3 0.15 12000 4 0.07 5600 5 0.11 8800 6 0.06 4800

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