Please show work so I can learn. Thank you. Your company is contemplating the pu
ID: 2719913 • Letter: P
Question
Please show work so I can learn. Thank you.
Your company is contemplating the purchase of a large stamping machine. The machine will cost $180,000. Additional transportation and installation costs are $5,000 and $10,000 respectively. Its MV at the end of five years is estimated as $40,000. The IRS has assured you that this machine will fall under a 3-year MACRS class life category. The justifications for this machine include $40,000 savings per year in labor and $30,000 savings per year in reduced materials. The before-tax MARR is 20% per year, and the effective income tax rate is 40%. The total before-tax cash flow in year five is (assuming you sell the machine at the end of year five):
Explanation / Answer
Answer: Calculation of before tax cash flow:
BTCF 5=(R-E)+MV
=[$40000+$30000)+$40000
=$110000