The management of Casper Company is planning to purchase a new milling machine t
ID: 2755516 • Letter: T
Question
The management of Casper Company is planning to purchase a new milling machine that will cost $160,000 installed. The old milling machine has been fully depreciated but can be sold for $15,000. The new machine will be depreciated on a straight line basis over it's 10 year economic life to an estimated salvage value of $10,000. If this milling machine will save Casper $20,000 a year in production expenses, what are the annual net cash flows associated with the purchase of this machine? Assume a marginal tax rate of 40 percent.
Explanation / Answer
Net Initial Cost of New Machine=Cost of New machine-Sale price of Old machine
=$160,000 -$15,000=$145,000
Year
Saving
Tax %40%
Net Saving
1
20,000
8000
12,000
2
20,000
8000
12,000
3
20,000
8000
12,000
4
20,000
8000
12,000
5
20,000
8000
12,000
6
20,000
8000
12,000
7
20,000
8000
12,000
8
20,000
8000
12,000
9
20,000
8000
12,000
10
20,000
8000
12,000
Salvage Value
10
10,000
4000
6,000
Total Net saving
126,000
Less
intial net investment
145000
Net Cashinflow
-19,000
Hence this Machine is not advisable to purchase
Year
Saving
Tax %40%
Net Saving
1
20,000
8000
12,000
2
20,000
8000
12,000
3
20,000
8000
12,000
4
20,000
8000
12,000
5
20,000
8000
12,000
6
20,000
8000
12,000
7
20,000
8000
12,000
8
20,000
8000
12,000
9
20,000
8000
12,000
10
20,000
8000
12,000
Salvage Value
10
10,000
4000
6,000
Total Net saving
126,000
Less
intial net investment
145000
Net Cashinflow
-19,000
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