The Mountain Jam Company purchased a machine 5 years ago for $70,000.It has an estimated life of 7 years from the time of purchase and is expected to have zero salvage value at the end of 7^th year.The old machine can be sold today for $60,000.A new machine can be purchased for $69,300.It has a 2-year life and is expected to reduce operating expenses by $50,000 per year.Sales aren't expected to change.After 2 years,the new machine can be sold for $20,000.The company uses the straight-line method to calculate depreciation for both machines.The tax rate is 40%.What is the initial cash flow for the project?

Question

Quizplus · Accepted Answer

Initial Cash Flow = -(Price of new asset) + (Net Salvage value of old asset) - (Increase in Net Working Capital) Net Salvage value = S - Tax on Sale Tax on sale = T × (S - B) ADepr = 5 × (70,000/7) = $50,000 B₅ = 70,000 - 50,000 = $20,000 Tax on Sale = 0.4 × (60,000 - 20,000) = $16,000 Net Salvage = 60,000 - 16,000 = $44,000 Initial Cash Flow = -69,300 + 44,000 = -$25,300

The Mountain Jam Company Purchased a Machine 5 Years Ago