Please show work A Drlling machine costs S60,000, falling into the MACRS 3-year
ID: 2792039 • Letter: P
Question
Please show work
A Drlling machine costs S60,000, falling into the MACRS 3-year class. Its purchase would require an increase in net operating working capital of S5,000 at t-0. The machine would increase the firm's revenues by $30,000 per year but would also increase operating costs by $8,000 per year. It will be sold for $20,000 at the end of year 3 . The firm's tax rate is 35%. Questions: What is the net investment required at t = 0? What is the operating cash flow in Year 2? What is the terminal year non-operating cash flows at the end of Year 3?Explanation / Answer
a)Net Investment =Purchase cost+working capital
=60000+5000
= $ 65000
b)Depreciation for year2 :60000*.4445 = 26670
Income before tax : sales -cost -depreciation
= 30000-8000-26670
= - 4670
Income after tax = -4670[1-.35]
= - 3035.5
Operating cash flow =Income after tax+ depreciation
= -3035.5 + 26670
= 23634.50
3)Book value of machine at year3 "=: cost [1-accumulated depreciation]
= 60000[1-.3333-.4445-.1481-.0741]
= 4446
gain on sale =20000-4446= 15554
Tax on gain =15554*.35= 5443.9
After tax gain on sale = 20000-5443.9 = 14556.1
tERminal value =after tax sale value+working capital
= 14556.1+5000
= 19556.1