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Homework answers / question archive / Windsor Corporation is considering an investment which will require the purchase of a machine
Windsor Corporation is considering an investment which will require the purchase of a machine. The machine costs $800,000, has a class life of 5 years, and will be depreciated using simplified straight-line depreciation. The firm's marginal tax rate is 35%. The incremental cash inflows expected over the 5-year life of the project are $260,000 per year, and cash expenses are $80,000 per year. In addition, the new machine will reduce defects by $15,000 per year. The new machine will require a one-time increase in net working capital of $25,000 at the time of installation. At the end of 5 years, the machine will be worthless, and the firm will not replace it. Calculate the annual cash flow resulting from this project. $182,750 $22,750 $5,000 $176,250 $163,250
Time line | 0 | 1 | |
Cost of new machine | -800000 | ||
Initial working capital | 0 | ||
=Initial Investment outlay | -800000 | ||
Sales | 275000 | ||
Profits | Sales-variable cost | 195000 | |
-Depreciation | Cost of equipment/no. of years | -160000 | |
=Pretax cash flows | 35000 | ||
-taxes | =(Pretax cash flows)*(1-tax) | 22750 | |
+Depreciation | 160000 | ||
=after tax operating cash flow | 182750 |