A corp. is trying to decide whether to invest in equipment to manufacture a new

Question

A corp. is trying to decide whether to invest in equipment to manufacture a new product. If the investment project is accepted, sales revenue will increase by $65,000 per year and materials costs will decrease by $16,000 per year. The equipment will cost $140,000 and is depreciable over 10 years using simplified straight line (zero salvage value). The firm has a marginal tax rate of 34%. Calculate the firm's annual cash flows resulting from the new project.

I keep getting 37100, but that is incorrect.

Explanation / Answer

Answer would be $ 58,220 and it has been calculated as follows: $ 65,000 (Increase in Sales) + $ 16,000 (Savings in Material Costs) = $ 81,000 $ 81,000 - $ 14000 (Annual Depreciation) = $ 67,000 Calculate Tax on this Value = $ 67,000 * .34 = $ 22,780 Calculate Value after depreciation and tax = $ 67,000 - $ 22,780 = $ 44,220 Add Depreciation to this value: $ 44,220 + $ 14,000 = $ 58,220 Thanks Aman

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