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?
MACRS Depreciation Rates

Question

Quizplus · Accepted Answer

EBIT = Revenues - Expenses - Depr
Revenues = $0
Expenses = -$200,000
Depr = 0.10 × 260,000 = $26,000
EBIT = -(-200,000) - 26,000 = $174,000
NOPAT = EBIT × (1 - T)
NOPAT = 174,000 × (1 - 0.34) = $114,840
OCF = NOPAT + Depreciation
OCF = 114,840 + 26,000 = $140,840
 11ea7fdb_fc7b_8491_a768_7f55132ee664_TB2902_00

The Munsell Colour Company Is Considering the Purchase of a New