Homework Answers
Solution:
a. Amount of the total initial investment = Purchase cost + Req. working capital
= $200,000 + $30,000
= $230,000
b. Net cash inflow for year 1 = (Savings in Op. exp. - Depreciation exp)*(1-tax rate) + Depreciation exp.
= ($60,000 - 36,000)*(1-0.40) + 36,000
= $50,400
c. Net cash inflow for year 5 = (Savings in Op. exp. - Depreciation exp)*(1-tax rate) + Depreciation exp. + Recovery of WC + Cash proceeds from sale of machine
= ($60,000 - 36,000)*(1-0.40) + 36,000 + 30,000 + 20,000
= $100,400
Workings:
Depreciation expense = (Purchase cost- Salvage value) / useful life
= ($200,000 - 20,000) / 5 = $36,000
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