Question
Hartsfield Company is considering the purchase of a new milling machine during year 0. The machines base price is $135,000, and it will cost another
Hartsfield Company is considering the purchase of a new milling machine during year 0. The machine’s base price is $135,000, and it will cost another $15,000 to modify it for special use. The capital allowance rate is given as 30%. The machine will be sold after three years for $80,000 (actual dollars). The use of the machine will require an increase in networking capital (inventory) of $10,000 at the beginning of the project year. The machine will have no effect on revenues, but it is expected to save the firm $80,000 (today’s dollars) per year in before-tax operating costs, mainly for labor. The firm’s marginal tax rate is 40%, and this is expected to remain unchanged over the duration of the project. However, the company expects that the labor cost will increase at an annual rate of 5%, but the working-capital requirement will grow at an annual rate of 8%, caused to inflation. The selling price of the milling machine is not affected by inflation. The general inflation rate is estimated to be 6% per year over the project period. The firm’s market interest rate is 20%.
Question:
1) Using the information above, find the capital cost allowance in year 2.
2) Using the information above, find the net cash flow in year 3 (actual dollars).
Step by Step Solution
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Answer 1 Answer Between 27485 and 59015 Option A is correct answer ie Between 27485 and 59015 2 Net cash flow for year 3 Explanation i The first part of the problem that one would need to solve here h...Get Instant Access to Expert-Tailored Solutions
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