You are asked to calculate the cash flows associated with the following proposal to purchase a new
Question:
You are asked to calculate the cash flows associated with the following proposal to purchase a new machine.
This machine can be purchased for $1,000,000. Assume the machine will qualify for a 10% investment tax credit. Also, assume it has a 10-year economic life.
In each of the 10 years, sales generated by this machine are estimated to be $ 300,000 a year. Operating expenses are estimated to be $100,000 a year for each of the 10 years. This machine will be depreciated on a straight-line basis, there is no salvage value.
Assume a tax rate of 40%.
a. Calculate the net after-tax cash outflow in year 0.
b. Calculate the net cash flows associated with this project for each of the years 1-10.
c. Suppose you’re told that this project will be financed with $600,000 of borrowed funds. If the interest expense
from the borrowed money will be $48,000 per year, how will this affect the net cash flow after tax you’ve
calculated? (No calculation is needed, just state the type of change)
Please detail your answer.
Managerial Accounting
ISBN: 978-1259307416
16th edition
Authors: Ray Garrison, Eric Noreen, Peter Brewer