Mars Inc. is considering the purchase of a new machine that costs $80,000. This machine will...

Free

70.2K

Verified Solution

Question

Finance

Mars Inc. is considering the purchase of a new machine thatcosts $80,000. This machine will reduce manufacturing costs by$20,000 annually. Mars will use the 3-year MACRS method (shownbelow) to depreciate the machine, and it expects to sell themachine at the end of its 5-year life for $10,000 salvage value.The firm expects to be able to reduce netoperating working capital by $8,000 when the machine is installed,but the net working capital will return to the original level whenthe project is over (i.e., after 5 years). Mars's marginal tax rateis 40 percent, and it uses a 12 percent cost of capital to evaluateprojects of this nature. Calculate the net cash flows of theproject.
Be sure to put the cash flows in the order, i.e., CF0 in blank1, CF1 in blank 2, CF2 in blank 3, etc. Cash outflows should benegative numbers, and round it to a whole number, e.g.,-23,500.
Year
MACRS Percentage
1
0.33
2
0.45
3
0.15
4
0.07
BLANK 1:_____
BLANK 2:_
BLANK 3_
BLANK 4_
BLANK 5
BLANK6_____

Answer & Explanation Solved by verified expert

4.2 Ratings (541 Votes)

Time line		0	1	2	3	4	5



Cost of new machine		-80000
Initial working capital		8000
=Initial Investment outlay		-72000

3 years MACR rate			33.00%	45.00%	15.00%	7.00%	0.00%

Savings			20000	20000	20000	20000	20000


-Depreciation	=Cost of machine*MACR%		-26400	-36000	-12000	-5600	0

=Pretax cash flows			-6400	-16000	8000	14400	20000
-taxes	=(Pretax cash flows)*(1-tax)		-3840	-9600	4800	8640	12000
+Depreciation			26400	36000	12000	5600	0
=after tax operating cash flow			22560	26400	16800	14240	12000

reversal of working capital							-8000

+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)						6000
+Tax shield on salvage book value	=Salvage value * tax rate						0
=Terminal year after tax cash flows							-2000

Total Cash flow for the period		-72000	22560	26400	16800	14240	10000

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Mars Inc. is considering the purchase of a new machine thatcosts $80,000. This machine will reduce manufacturing costs by$20,000 annually. Mars will use the 3-year MACRS method (shownbelow) to depreciate the machine, and it expects to sell themachine at the end of its 5-year life for $10,000 salvage value.The firm expects to be able to reduce netoperating working capital by $8,000 when the machine is installed,but the net working capital will return to the original level whenthe project is over (i.e., after 5 years). Mars's marginal tax rateis 40 percent, and it uses a 12 percent cost of capital to evaluateprojects of this nature. Calculate the net cash flows of theproject.Be sure to put the cash flows in the order, i.e., CF0 in blank1, CF1 in blank 2, CF2 in blank 3, etc. Cash outflows should benegative numbers, and round it to a whole number, e.g.,-23,500.YearMACRS Percentage10.3320.4530.1540.07BLANK 1:___________BLANK 2:___________BLANK 3___________BLANK 4___________BLANK 5____________BLANK6_____________