A new machine\'s price is $50,000 plus additional $10,000 for shipping and insta

Question

A new machine's price is $50,000 plus additional $10,000 for shipping and installation. The machine falls into the MACRS three year class, and hence the tax depreciation allowances are .33, .45 and .15 in Years 1,2 and 3 respectively. The machine will be sold at the end of tree years for $20,000. the machine will have no effect on revenue, but will save $20,000 per year in before-tax operating costs. The firm's tax rate is 40% and its appropriate cost of capital is 10%,
what is the project's operating cash flows in Years 1,2, and 3?

possible answers:
$19,920, $22,800, $15,600
$20,000, $20,000, $20,000
$15,600, $22,,800, $19,920
$19,920, $22,800, $35,600

Explanation / Answer

Year 1

2

3

After tax saving

12000

12000

12000

depreciation

19800

27000

9000

Depreciation tax saving

7920

10800

3600

Operating cash flow

19920

22800

15600

A new machine's price is $50,000 plus additional $10,000 for shipping and installation. The machine falls into the MACRS three year class, and hence the tax depreciation allowances are .33, .45 and .15 in Years 1,2 and 3 respectively. The machine will be sold at the end of tree years for $20,000. the machine will have no effect on revenue, but will save $20,000 per year in before-tax operating costs. The firm's tax rate is 40% and its appropriate cost of capital is 10%,
What is the project's operating cash flows in Years 1,2 and 3?


$19,920, $22,800, $15,600 -anawer
$20,000, $20,000, $20,000
$15,600, $22,800, $19,920
$19,920, $22,800, $35,600

Year 1

2

3

After tax saving

12000

12000

12000

depreciation

19800

27000

9000

Depreciation tax saving

7920

10800

3600

Operating cash flow

19920

22800

15600

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