Regal Enterprises is considering the purchase of a new embroidering machine. It

Question

Regal Enterprises is considering the purchase of a new embroidering machine. It is expected to generate additional sales of $400,000 per year. The machine will cost $295,000, plus $3,000 to install it. The embroiderer will save $12,000 in labor expense each year. Regal is in the 34% income tax bracket. The machine will be depreciated on a straight-line basis over five years (it has no salvage value). The embroiderer will require annual operating expenses of $136,000. What is the annual operating cash flow that the machine will generate?

Explanation / Answer

Revenues 400,000

Costs:
Operating expenses 136,000
Labor savings (12,000)
Depreciation 59,600 (298,000/5)
Total costs 183,600
Income before tax 216,400
Less:Taxes (34%) 73,576
Net income 142,824
Add back depreciation 59,600 (non cash charge)
Cash flow 202,424

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