1. XYZ is interested in buying a new machine which is expected to cost $85,000.
ID: 2767023 • Letter: 1
Question
1. XYZ is interested in buying a new machine which is expected to cost $85,000. In addition, the company will pay $15,000 in shipping and $5,000 in installation costs. The MACRS category is five years and the company expects to sell the machine at 25% above book value at the end of year 5. Its investment in working capital will be recovered once the machine is sold. Before buying this machine, it paid a consultant $5,000 fee for her advice. Once the machine is installed, the company will experience an increase in current assets of $7,000 and a decrease of $2,000 in current liabilities. The new machine will increase revenue by $15,000 while decreasing operating costs by $20,000 per year. Its tax rate is 35%. Prepare the following statements:
Do not use excel formulas, use PVIF
a) Initial investment
b) Operating cash flows and
c) End of project non-operating cash flows
Explanation / Answer
The general reconciliation format for the operating section is as follows:
MACRS 5 year depreciation table Cost 85000 Year 1 20% 22000 Shipping Cost 15000 Year 2 32% 35200 Installation Cost 5000 Year 3 19.20% 21120 Consultant Fee 5000 Year 4 11.52% 12672 Year 5 11.52% 12672 Total Initial Investment 110000 Selling price at the end of 5 years 15840Related Questions
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