Question
The operating cash flow in year 1 is (Use the following information): A proposed power-saving equipment has a purchase price of $580,000. The equipment will
The operating cash flow in year 1 is (Use the following information):
A proposed power-saving equipment has a purchase price of $580,000. The equipment will be used in a four-year project but is classified as five-year MACRS property for tax purposes. The equipment is expected to save $280,000 before taxes per year in energy costs, and it will have a salvage value of $60,000 at the end of the project. To decide on the feasibility of the investment, the managers have ordered a series of tests to determine whether the proposed equipment will realize the required costs savings or not for a total cost of $18,000. The required rate of return on the equipment is 14% and it is expected to increase working capital by $45,000 at the beginning of the project. The tax rate is 35 percent and the MACRS depreciation schedule is as follows:
Year | 1 | 2 | 3 | 4 | 5 | 6 |
MACRS | 20.00% | 32.00% | 19.20% | 11.52% | 11.52% | 5.76% |
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