Question

You need to evaluate the purchase of a new molding machine. The equipment's basic price is $97,172, and it would cost another $10,797 to modify it for special use by your firm. The molding machine, which falls into the MACRS 3year class, would be sold after 3 years for $38,869. The MACRS rates for the first three years are 0.3333,0.4445, and 0.1481. Use of the equipment would require an increase in net working capital (spare parts inventory) of $5,714. The machine would have no effect on revenues, but it is expected to save the firm $42,012 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 21.0% and its cost of capital is 14.0%. How much is the year 1 operating cash flow for this project?

a)$41,838
b)$37,146
c)$40,747
d)$38,112
e)$43,951

Answer 1

Upon evaluating the provided data, none of the options given match the calculated year 1 operating cash flow for the new molding machine. The calculation yielded a result of $12,284.51, yet this does not align with any of the provided choices.

Step-by-step explanation:

To evaluate the year 1 operating cash flow for the purchase of a new molding machine, the following calculations are made:

• Cost savings per year: $42,012
• Depreciation for year 1 (using MACRS rate for year 1, 0.3333): (Total cost of machine $97,172 + modification costs $10,797) * 0.3333 = $36,055.22
• Tax shield from depreciation: $36,055.22 * 21% = $7,571.60
• After-tax savings: ($42,012 - $36,055.22) * (1 - 21%) = $4,712.91
• Total operating cash flow for year 1: $4,712.91 + $7,571.60 = $12,284.51

Therefore, none of the provided options (a to e) exactly match the calculated year 1 operating cash flow of $12,284.51. There may be an error in the calculation due to not including or incorrectly assessing some costs or benefits associated with the operation of the machine. It is also possible there's a misunderstanding of the question's requirements or provided information.