Use the Following Information for Questions 8-A Through 8-C

question 10

Essay

Use the following information for questions 8-a through 8-c. You have been asked to evaluate the purchase of a new machine for your company. It will cost $60,000, and it falls into the MACRS 3-year class (Yr. 1 - 33.3%; Yr. 2 - 44.4%; Yr. 3 - 14.8%; Yr. 4 - 7.5%). The purchase will require a $6,000 increase in repair parts inventory. Parts are expensed for tax purposes at the time they are acquired. The machine will replace one $25,000/year operator. It is expected to last for four years when it can be sold including any spare parts still on hand for $5,000. The tax rate is 40% and your company's cost of capital is 12%.
a. What is the initial outlay for this project?
a. $46,000
b. $48,000
c. $54,000
d. $60,000
e. $66,000

b. What is the (operating) cash flow in Year 2?
a. $10,656
b. $15,000
c. $25,656
d. $26,640
e. $41,640

c. What is the cash flow in year 4?
a. $30,000
b. $18,000
c. $17,000
d. $19,800
e. $11,000

---

Definitions:

Bad Debts Expense

The cost associated with the portion of accounts receivable that is estimated to be uncollectible during a fiscal period.

Uncollectible Account

A receivable that is considered uncollectible from a debtor, usually displayed as an expense.

Allowance for Doubtful Accounts

A contra-account reducing accounts receivable to reflect the amount expected not to be collected due to customers' defaulting.

Gross Amount

The total amount before any deductions, such as taxes, expenses, or discounts, are subtracted.