Question
Terra Corp is considering the purchase of a new machine that has a quoted price of $400,000. Shipping and installation will be an additional $20,000,
Terra Corp is considering the purchase of a new machine that has a quoted price of $400,000. Shipping and installation will be an additional $20,000, and the machine will require an initial investment in net working capital of $18,000. The machine will be depreciated fully, with equal amounts of depreciation each year, over a six-year schedule. Also, the machine will be kept for six years, if purchased. During each of those six years, it is estimated that the machine will cause an increase in Terras revenues to the extent of $188,000. Annual operating costs will also increase by $22,000. At the end of the six years, it is expected that the machine could be sold for $190,000. Terra Corp faces a marginal tax rate of 30%. The companys weighted average cost of capital is 13%. What is the annual operating cash flow associated with this machine/project for years 1 through 5?
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