After tax salvage and the return of working capital

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Reference no: EM131884262

You are evaluating a new machine. The equipment’s basic price is $70,000, and it would cost another $15,000 to modify it. The machine falls into MACRS 3-year class and would be sold after 3 years for $30,000. The MACRS rates for three years are 0.3333, 0.4445, and 0.1481. The machine requires an in net working capital (inventory) of $4,000. The machine would have no effect on revenues, but it is expected to save the firm $25,000 per year before tax operating costs. The firm’s tax rate is 40%.

a) What is the year 0 net cash flow?

b) what are the net operating cash flows in year 1,2, and 3?

c) what is the additional year 3 cash flow (after tax salvage and the return of working capital?

d) should you purchase the machine (assume cost of capital is 10%)

Reference no: EM131884262

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