What is the Required Cash Outflow for Acquiring a New Machine?

E

Cost plus installation($10,000)

Sale of old machine+2,000 -

Tax effect of sale ($1,000 x 0.34)(350)

Decrease in working capital1,500

Total investment at t = 0($6,850)

To determine the required cash outflow associated with the acquisition of a new machine at time t = 0, we need to consider all the relevant cash flows. Let's break down the information provided:

Purchase price of new machine: $8,000 This represents the cost of acquiring the new machine. It is a cash outflow and should be included in the calculation.

Installation charge: $2,000 This charge is associated with installing the new machine. Since it is a cash outflow, it should be included.

Market value of old machine: $2,000 This represents the market value of the old machine. Since the machine is being replaced, this amount can be considered a cash inflow. However, since the question specifically asks for the cash outflow, we will exclude this value.

Book value of old machine: $1,000 The book value of the old machine is irrelevant for calculating the cash outflow.

Inventory decrease if new machine is installed: $1,000 If the new machine is installed, there will be a decrease in inventory. This implies that inventory will be sold or used up. Since this represents a reduction in assets, it can be considered a cash outflow.

Accounts payable increase if new machine is installed: $500 If the new machine is installed, there will be an increase in accounts payable. This represents an increase in liabilities, which can be considered a cash inflow. However, since the question asks for the cash outflow, we will exclude this value.

Tax rate: 35% The tax rate is relevant for calculating the tax implications of the cash flows, but it does not directly affect the cash outflow.

Cost of capital: 15% The cost of capital is used to discount cash flows in project analysis, but it does not directly impact the cash outflow.