The Munsell Colour Company is considering the purchase of a new batch polymer mi
ID: 2790165 • Letter: T
Question
The Munsell Colour Company is considering the purchase of a new batch polymerminusbonding 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 beforeminustax 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 10minusyear 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? The Munsell Colour Company is considering the purchase of a new batch polymerminusbonding 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 beforeminustax 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 10minusyear 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? The Munsell Colour Company is considering the purchase of a new batch polymerminusbonding 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 beforeminustax 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 10minusyear 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? The Munsell Colour Company is considering the purchase of a new batch polymerminusbonding 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 beforeminustax 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 10minusyear 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? The Munsell Colour Company is considering the purchase of a new batch polymerminusbonding 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 beforeminustax 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 10minusyear 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? polymerminusbonding beforeminustax 10minusyearExplanation / Answer
1) Calculation of Operating cash flows during year 1 :
As per given information the reduction in costs almost equal to increase in revenues which will fall under the category of Positive Operating cash flow and at the same time increase in inventories also falls under the category of Opeating cash flow but with negative symbol.
Net Operating cash flow from the given information = $200,000 - $15,000
= $185,000