Final answer:
The operating cash flow in year 1 is $102,600 after accounting for operational costs, depreciation, and tax effects. The NPV calculation would require all cash flows across the five-year span, discounted at 9%, and would also include the tax-adjusted salvage value, minus the initial machine cost.
Step-by-step explanation:
To calculate the operating cash flow for year 1, we must consider the initial cost of the machine, the annual operating costs, the depreciation expenses, and the tax savings from depreciation. The initial cost of the machine is not included in the operating cash flow for year 1, as this is a capital expenditure that will be included in the NPV calculation instead. The annual depreciation expense is calculated by taking the difference between the initial cost of the machine ($300,000) and the salvage value ($100,000), then dividing by the life of the machine (5 years): ($300,000 - $100,000) / 5 = $40,000. This depreciation reduces the taxable income, thus reducing the taxes paid. The operating cash flow incorporates these annual operational costs, the tax shield from depreciation, and the tax rate.
The formula for operating cash flow (OCF) is:
- OCF = (Revenue - Operating Costs - Depreciation) * (1 - Tax Rate) + (Depreciation)
Assuming the machine doesn't generate additional revenue, the operating costs are $90,000, the depreciation is $40,000, and the tax rate is 21%, the OCF for year 1 would be calculated as follows:
OCF = ($90,000 + $40,000) * (1 - 0.21) + $40,000 = $102,600
To calculate the Net Present Value (NPV), we need to discount the sum of the initial investment, the operating cash flows over the life of the machine, and the salvage value, adjusted for taxes, back to present value terms at the discount rate of 9%. The NPV calculation would consider the cash flows for each year, including the tax-adjusted salvage value, and then subtract the initial machine cost.