Operating cash flow The BMI Corporation is analyzing the proposed purchase of a

Question

Operating cash flow

The BMI Corporation is analyzing the proposed purchase of a new machine for $75,000. The proposed machine has an estimated economic life of four years but will be treated as three-year MACRS property for depreciation purposes. The machine will increase the firm's capacity, and it is expected to contribute $35.000 annually to earnings before depreciation and taxes. The firm is in a 32% tax bracket and estimates its cost of capital to be 16%. Calculate the first year's cash flow from this investment. (MACRS tables are above.)

Explanation / Answer

Year EBDT contribution Depreciation Profit before tax Tax@32% Net income Depreciation Operating cash flows 1 $         35,000 $          24,975 $                 10,025 $     3,208 $         6,817 $          24,975 $    31,792

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