XYZ would like to purchase a new machine. It will cost $50,000. Shipping and ins

Question

XYZ would like to purchase a new machine. It will cost $50,000. Shipping and installation charges for the equipment are expected to total $5,000. This equipment will be depreciated using straight line for its 5 year economic life to an estimated salvage value of zero. In order to use this equipment, XYZ estimates it will have to add $7,000 initially to its net working capital. If the machine is purchased, it will replace a machine with a book value of $10,000, the old machine can be sold for $25,000. During the first year of operations, the company expects total revenues to increase by $50,000, and from years 2 to 5 increase by $60,000 per year. The incremental operating expense is expected to be $10,000 in the first year and increase each year by 5%. The marginal tax rate is 40%. Find year 5 cash flows.

Explanation / Answer

Year 5 cashflow = (revenue - expenses - depreciation)*(1-tax rate)) + depreciation + working capital recovered

= ( (50000 + 4*60000) - (10000*(1.05)4 ) - (55000/5) ) * (1 - 40%) ) + (55000/5) + 7000

= 178106.96

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