Question
You are considering an investment in a new machine. The firms tax rate is 30%. Answer this question in Excel. Please highlight or circle your
You are considering an investment in a new machine. The firms tax rate is 30%. Answer this question in Excel. Please highlight or circle your answers. The machine is expected to have the following:
| Year | Change in revenue | Change in expenses | After tax increases in revenue | Change in depreciation | Tax benefit of depreciation | Change in net working capital | Change in capital spending | Incremental Cash Flow |
| 0 | 0 | 0 | 0 | +20,000 | +100,000 | =120,000 | ||
| 1 | +20,000 | +5,000 | =10,500 | 15,000 | +2,000 | 0 | ||
| 2 | +20,000 | +5,000 | =10,500 | 15,000 | +2,000 | 0 | ||
| 3 | +20,000 | +5,000 | =17,500 | 15,000 | -5,000 | -15,000 | ||
| 4 | +30,000 | +5,000 | =17,500 | +20,000 | +2,000 | 0 | ||
| 5 | +30,000 | +5,000 | =17,500 | +20,000 | -21,000 | -20,000 |
a) What is the expected incremental cash flow each year for this new machine?
b) Should you approve this project? Why or why not?
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Financial Theory and Corporate Policy
Authors: Thomas E. Copeland, J. Fred Weston, Kuldeep Shastri
4th edition
321127218, 978-0321179548, 321179544, 978-0321127211
