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?
A) $316,954
B) $124,000
C) $202,424
D) $165,816

Explanation / Answer

Here's what I get 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 C)

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