Your company is contemplating the purchase of a large stamping machine. The mach

Question

Your company is contemplating the purchase of a large stamping machine. The machine will cost $180,000. With additional transportation and installation costs of $5,000 and $10,000, respectively, the cost basis for depreciation purposes is $195,000. Its MV at the end of ve years is estimated as $40,000. The IRS has assured you that this machine will fall under a three-year MACRS class life category. The justications for this machine include $40,000 savings per year in labor and $30,000 savings per year in reduced materials. The before-tax MARR is 20% per year, and the effective income tax rate is 40%. The total before-tax cash ow in year ve is most nearly (assuming you sell the machine at the end of year ve):

Explanation / Answer

Compute the Total before tax cash flow in year 5.

Calculation of before tax cash flow:

BTCF 5 = (R-E)+MV

=[$40000+$30000)+$40000

=$110000

Therefore, the cash flow before tax of year 5 is $110000.

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