ABC will purchase a machine that will cost $2,575,000.Required modifications wil

Question

ABC will purchase a machine that will cost $2,575,000.Required modifications will cost $375,000. ABC will need to invest$75,000 for additional inventory. The machine has an IRS approveduseful life of 7 years; it is presumed to have no salvage value.ABC plans to depreciate the machine by using the straight linemethod. The machine is expected to increase ABC's sales revenues by$1,890,000 per year; operating costs excluding depreciation areestimated depreciation are estimated at$454,600 per year. Assumethat the firm's tax rate is 40%. What is the annual operating cashflow? a) $922,464 b) $1,126,287 c) $813,563 d) $1,029,811 ABC will purchase a machine that will cost $2,575,000.Required modifications will cost $375,000. ABC will need to invest$75,000 for additional inventory. The machine has an IRS approveduseful life of 7 years; it is presumed to have no salvage value.ABC plans to depreciate the machine by using the straight linemethod. The machine is expected to increase ABC's sales revenues by$1,890,000 per year; operating costs excluding depreciation areestimated depreciation are estimated at$454,600 per year. Assumethat the firm's tax rate is 40%. What is the annual operating cashflow? a) $922,464 b) $1,126,287 c) $813,563 d) $1,029,811

Explanation / Answer

calculation ofdepreciation:- Cost 2575000 Modification cost 375000 Total 29500000 Deprection = 29500000/7 = 421429 Calculation of annual operating cashflows:- Sales 1890000 Expenses -454600 Deprecition -421429 PBT 1013971 Tax(40%) -404484 PAT 608382 Add: deprecition 421429 Annual operating cash flow $1029811 Answer: (d) $1029811

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