We are considering buying a widget fogger for $50,000. It will be depreciated according to the SACRS schedule (30%, 25%, 15%, 15%, 15%). We plan to keep it for 3 years and then sell it for $4,000. Our tax rate is 20%. This new machine will help us in two ways. Fogged widgets can be sold for more, so the machine will raise revenues by $2,000, and it will save $4,000 each year in costs. What are the after-tax operating cash flows (including the depreciation tax shield) that would result in each year during the three-year life of the new machine?
(a) Write the depreciation table. Calculate the cash flows resulting from the sale of the machine at time 3.
(b) What are the cash flows associated with the purchase of this machine, beginning with its purchase and ending with its sale?