P.D. Corporation is considering the purchase of a high-speed lathe that has an invoice price of $250,000
The
cost to ship the lathe to P.D.'s factory is $10,000, and the existing facilities will require modifications that are
expected to cost $20,000. The machine will be depreciated on a straight-line basis over its useful life of 10 years,
assuming no salvage value. P.D. Corporation is planning on paying for the lathe using a line of credit at the
bank that has an interest rate of 6 percent per year. The lathe is expected to increase production and sales. Sales
are expected to increase by $100,000 per year. Inventory and accounts receivable balances are expected to
increase by $10,000 and $20,000 respectively. Expenses to operate the lathe are $25,000 per year. P.D.'s marginal
tax rate is 40%.
a. Calculate the initial outlay required to fund this project.
b. Calculate the incremental after-tax cash flow in year one of the project.
a. Invoice price plus shipping plus modifications plus additional net working capital items:
$250,000 + $10,000 + $20,000 + $10,000 + $20,000 = $310,000
b. (Sales - operating expenses - depreciation) (1 - t) + Depreciation =
($100,000 - $25,000 - $28,
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