Bulldog Inc. purchased a leather-cutting machine seven years ago. The cost of th
ID: 2794144 • Letter: B
Question
Bulldog Inc. purchased a leather-cutting machine seven years ago. The cost of the machine was $11,200. It was epected to be used for 10 years. The machine has been depreciated on a straight-line basis with an estimated salvage value of $1,200. The machine can be sold for $3,500 today. Bulldog is considering the purchase of a new leather-cutting machine to replace exisiting machine. Having the new machine will result in an increase of revenue $13,000, but the operating costs will also increase by $6,000 for 3 years. The new machine cost $14,000, with an expected salvage of $2,000 at the end of the third year. The new machine will be depreciated using MACRS method, and is considered a 3-year property. There will be an increase of $1,600 in net working capital. Gorilla's tax rate is 40% and cost of capital is 16%
The expected after-tax salvage value of the new machine is $1,620. Compute the expected net cash flow at the end of year 3. (Note: You are asked to find CF3 only, not NPV) Answer is $7,848.80 How did I get this >show work
Explanation / Answer
Cash flow in year 3:
= (Revenue - operating costs - depreciation)*(1-tax rate) + depreciation + after tax salvage value + release of WC
= (13000-6000-0.1481*14000)*(1-0.4) + 0.1481*14000 + (1620 - (1620-0.0741*14000)*0.4) + 1600
= 8016.32
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