Operating Cash Flow: Premier Steel, Inc. is considering the purchase of a new ma
ID: 2715309 • Letter: O
Question
Operating Cash Flow: Premier Steel, Inc. is considering the purchase of a new machine for $100,000 that has a useful life of 3 years. The firm’s cost of capital is 11.0% and the tax rate is 40%. This machine will be sold for its salvage value of $20,000 at the end of 3-years. The machine will require an investment of $2,500 in spare parts inventory upon installation. The machine will cost $8,000 to ship and $4,000 to install and modify it.
Sales are as follows: year 1 = $90,000; year 2 = $97,500; year 3 = $105,000. Operating expenses are year 1 = $25,000; year 2 = $27,000; year 3 = $29,000. The investment in working capital will be liquidated at termination of the project at the end of year 3.
Using MACRS, what is the operating cash flow in year 1?
A:53,784
B:86,999
MACRS Rates 33% 45% 15% 7%Explanation / Answer
Cost of machine = 100,000 + 8000 + 4000 = 112000
Operating cash flow :
sales 90000
less:operating expenses (25000)
Depreciation (112000*.33) (36960)
Income before tax 28040
less:Tax (11216)
Income after tax 16824
Add:Depreciation 36960
OPerating cash flow 53784
correct option is"A"
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.