Question

You are tasked with evaluating the purchase of a vending machine for the snack room.

The base price is $4,000 and it would cost another $1,000 to modify the machine to install the machine. The equipment falls in the MACRS 3 year class of depreciation with rates of 33%, 45%, 15% and 7%. The machine would require an investment in snacks (inventory/net operating working capital) of $500. The machine would produce revenue of $3,000 per year with costs of $534 per year. The firm’s tax rate is 20%.

The firm plans on selling the machine at the end of three years for $1500 and recovering their investment in net working capital at that time as well.

What is the operating cash flow associated with the first year of operation?

Answer 1

	operating cash flow associated with the first year of operation
i	revenue		3000
ii	Cost		534
iii	Depreciation	=(4000+1000)*33%	1650
iv=i-ii-iii	Profit before tax		816
v=iv*20%	tax @ 20%		163.2
vi=iv-v	Profit after tax		652.8
vii=vi+iii	Operating cash flow		2302.8
Therefore operating cash flow			2302.8