Reference no: EM132856562

You are considering the purchase of a new machine that will cost $200,000 and be depreciated over five years using straight-line depreciation. You expect that it will require $20,000 per year in annual maintenance, and that you will need to purchase $10,000 in spare parts at the time you purchase the machine. You will maintain a steady inventory of spare parts until you sell off the machine in four years for $32,000, at which time your inventory of spare parts will be zero. You also expect that you will need to spend $4,000 in initial training for your employees on how to use the machine most effectively. If your tax rate is 25%, and your WACC is 10%, please answer the following questions.

Problem 1: What is the operating cash flow created each year by purchasing this machine?

Option 1: -$5,000

Option 2: -$20,000

Option 3: -$45,000

Option 4: -$60,000