The Munsell Colour Company is considering the purchase of a new batch polymer-bo
ID: 2738397 • Letter: T
Question
The Munsell Colour Company is considering the purchase of a new batch polymer-bonding machine for producing its number one line of crayons. Although the machine being considered will not produce any increase in sales revenues, it will result in the before-tax reduction of labour costs by $200,000 per year. The machine has a purchase price of $250,000, and it would cost an additional $10,000 to install the machine. In addition, to operate this machine, inventory must be increased by $15,000. The machine is categorized as 10-year property. After 2 years, it can be sold for $150,000. The tax rate is 34% and the cost of capital is 15%. What are the operating cash flows at the end of Year 1? A.$132,000 b.$136,420 c.$140,840 d.$165,780 e.$175,240
Explanation / Answer
Calculation of operating cash flow at the end of Year 1 Reduction in labour cost $2,00,000.00 (-) Depreciation of new machine $26,000.00 Increase in net Income $1,74,000.00 (-) Tax @ 34% $59,160.00 Increase in Profit after tax $1,14,840.00 (+) Depreciation $26,000.00 Operating Cash flow at the end of first year $1,40,840.00 Note Depreciation on new machine = (Cost of the machine + Installation cost) / useful life = ($250000 +$10000)/10 = $26000