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PROJECT CASH FLOW ANALYSIS

Your company plans to produce a product for two more years and then to shut down production. You are considering replacing an old machine used in production with a new machine. The Old machine originally cost $552 and was bought Three (3) years ago (i.e. it has depreciated for three years). It could be sold today for $330 or sold in two years for $66. The New machine would cost $556 and could be sold in two years for $227. The new machine is more efficient than the old machine and would reduce waste, and therefore the cost of materials, by $179 per year. Due to the lower waste, we could also have a one-time reduction in inventory of 17. The firm's tax rate is 41%. Both machines are in the 4 year MACRS class, with depreciation amounts of 15%, 45%, 33% and 7%. What are the Operating Cash Flows in the first year (Year 1) with the new machine?

Solution Preview

Please find the answer to your question attached. I gave you a little more than you requested in an attempt to make the concepts clearer to you.

Answer:
The question provided you with so much information that you might be confused as to the relevance of it all. The fact is that you have enough information here to solve for the initial investment of the project, as well as, the operating cash flows in each year of the project's life.
However, your question only required you to determine the operating cash flow in the first year of the projects life. To help you understand the information given I ...

Solution Summary

This solution shows a step by step guide on how to determine the initial investment on a long-term project. It also explains the methods available for analyzing the project cash flows and deciding whether the firm should invest in that project.

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