A new machine\'s is 50,000 plus an additional 10,000 for shiping and installatio

Question

A new machine's is 50,000 plus an additional 10,000 for shiping 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 three years for 20,000. The machine will have no effect on revenues, but will save 20,000 per year in before-tax operating costs. The firm's tax rate is 40 percent and its approriate cost of capital is 10%. What are the terminal cash flows at the end of year 3 ?

Explanation / Answer

cash infow of 1st year = 25488((((20000-6600)*.60)+20000)*.909)

cash infow of 2nd year = 21972

cash infow of 3rd year = 22680

Total = 70140-60000

Net inflow is 10140. Hence, it is financial viable.

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