51 A company is looking to invest in new machinery. The cost of the machinery, i

Question

51 A company is looking to invest in new machinery. The cost of the machinery, including shipping and installation costs, is $34.75 million. The company has estimated that revenue will increase $38.9 million in each of the next 3 years if the machinery is purchased. Costs (both variable and fixed) are also expected to increase $10.2 million in each of the next3 years. The company uses a standard straight-line depreciation method. In particular, the company will straight-line depreciate the machinery to $7.8 million over the 3-year life of the project What will the differential cash flows be in each of the next 3 years if the marginal tax rate is 39%? Round your answer to 2 decimal places @ $28.70 million C $19.72 million $20.41 million @ $12.03 million O $21.01 million NEXT > BOOKMARK CLEAR

Explanation / Answer

Annual depreciation = ( 34.75 - 7.8 ) / 3

Annual depreciation = 8.98 million

Differential cash flow = ( sales - costs - depreciation)( 1 - tax) + depreciation

Differential cash flow = ( 38.9 - 10.2 - 8.9 )( 1 - 0.39 ) + 8.9

Differential cash flow = ( 19.8 ) ( 0.61 ) + 8.9

Differential cash flow = $21.01 million

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