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 is the initial cash flow for the project?
MACRS Depreciation Rates

Question

Quizplus · Accepted Answer

Initial Cash Flow = -(Initial purchase price of new asset) - (Increase in Net Working Capital)
Initial cash flows = -250,000 - 10,000 - 15,000 = -$275,000

The Munsell Colour Company Is Considering the Purchase of a New