The Munsell Color Company is considering the purchase of a new batch p

The Munsell Color Company is considering the purchase of a new batch polymer-bonding machine for producing its number one line of crayons.

Although the machine being considered will not produce any increase in sales revenues, it will result in the before-tax reduction of labor costs by $200,000 per year. The machine has a purchase price of $250,000, and it would cost an additional $10,000 to install the machine. In addition, to operate this machine, inventory must be increased by $15,000. The machine is categorized as 10-year property. After 2 years, it can be sold for $150,000. The tax rate is 34% and the cost of capital is 15%. What is the initial cash flow for the project?

MACRS Depreciation Rates
Year 10-Year 15-Year
1 10.00% 5.00%
2 18.00% 9.50%
3 14.40% 8.55%

A) -$250,000
B) -$260,000
C) -$265,000
D) -$275,000
E) -$285,000

ANSWER

D