Startle Corporation wants to purchase a new production machine. They currently have an old machine, which is operable for five more years and is expected to have a zero-disposal value at the end of five years. If the company buys the new machine, the old machine will be sold now for $65,000 (book value is $73,000). The new machine will cost $600,000 and will be depreciated for tax purposes on a straight-line basis over its useful life of 5 years. The new machine will not have a salvage value and will not be sold after its useful life. An additional cash investment in working capital of $50,000 will be required if the new machine is purchased. The investment is expected to generate $75,000 in before tax cash net inflows during the first year of operation. The expected before tax cash net inflow for years two through five is $220,000 each year. These cash flows do not include depreciation and are recognized at the end
Startle Corporation wants to purchase a new production machine. They currently have an old machine, which is operable for five more years and is expected to have a zero-disposal value at the end of five years. If the company buys the new machine, the old machine will be sold now for $65,000 (book value is $73,000). The new machine will cost $600,000 and will be depreciated for tax purposes on a straight-line basis over its useful life of 5 years. The new machine will not have a salvage value and will not be sold after its useful life. An additional cash investment in working capital of $50,000 will be required if the new machine is purchased. The investment is expected to generate $75,000 in before tax cash net inflows during the first year of operation. The expected before tax cash net inflow for years two through five is $220,000 each year. These cash flows do not include depreciation and are recognized at the end
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 9P
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Question
![dollar)
What are the after-tax cash flows in year 1 and year 2? (Round to the nearest
b.
d.
a. $75,000 and $220,000
$190,000 and $190,000
c. $190,000 and 220,000
$70,500 and $190,000
e. $220,000 and $220,000
f. $75,000 and $190,000
g. $220,000 and $18,000
h. None of the above](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F8e2daad5-4179-4840-8129-eb3060ea6a31%2F37e3ac00-3947-4c9e-9d1a-dc4f3325e4f9%2Ffrzow2j_processed.png&w=3840&q=75)
Transcribed Image Text:dollar)
What are the after-tax cash flows in year 1 and year 2? (Round to the nearest
b.
d.
a. $75,000 and $220,000
$190,000 and $190,000
c. $190,000 and 220,000
$70,500 and $190,000
e. $220,000 and $220,000
f. $75,000 and $190,000
g. $220,000 and $18,000
h. None of the above
![Startle Corporation wants to purchase a new production machine. They currently have an old
machine, which is operable for five more years and is expected to have a zero-disposal value at
the end of five years. If the company buys the new machine, the old machine will be sold now
for $65,000 (book value is $73,000). The new machine will cost $600,000 and will be
depreciated for tax purposes on a straight-line basis over its useful life of 5 years. The new
machine will not have a salvage value and will not be sold after its useful life. An additional
cash investment in working capital of $50,000 will be required if the new machine is purchased.
The investment is expected to generate $75,000 in before tax cash net inflows during the first
year of operation. The expected before tax cash net inflow for years two through five is
$220,000 each year. These cash flows do not include depreciation and are recognized at the end
of each year. The working capital investment will not be recovered at the end of the asset's life.
The company's tax rate is 30%.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F8e2daad5-4179-4840-8129-eb3060ea6a31%2F37e3ac00-3947-4c9e-9d1a-dc4f3325e4f9%2Fk8ivv1b_processed.png&w=3840&q=75)
Transcribed Image Text:Startle Corporation wants to purchase a new production machine. They currently have an old
machine, which is operable for five more years and is expected to have a zero-disposal value at
the end of five years. If the company buys the new machine, the old machine will be sold now
for $65,000 (book value is $73,000). The new machine will cost $600,000 and will be
depreciated for tax purposes on a straight-line basis over its useful life of 5 years. The new
machine will not have a salvage value and will not be sold after its useful life. An additional
cash investment in working capital of $50,000 will be required if the new machine is purchased.
The investment is expected to generate $75,000 in before tax cash net inflows during the first
year of operation. The expected before tax cash net inflow for years two through five is
$220,000 each year. These cash flows do not include depreciation and are recognized at the end
of each year. The working capital investment will not be recovered at the end of the asset's life.
The company's tax rate is 30%.
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