Nickel Industries is considering the purchase of a new machine that will cost $1

Question

Nickel Industries is considering the purchase of a new machine that will cost $178,000, plus an additional $12,000 to ship and install. The new machine will have a 5-year useful life and will be depreciated using the straight-line method. The machine is expected to generate new sales of $85,000 per year and is expected to increase operating costs by $10,000 annually. Nickel's income tax rate is 40%. What is the projected incremental cash flow of the machine for year 1? Answer A)$68,200 B)$66,350 C)$60,200 D)$54,800

Explanation / Answer

cost = $178000

install and ship cost = 12,000

depriciation = 190000/5 = $38,000

new sales = $85,000

increase in operating costs = $10,000

hence EBIT = 85000-10000 - 38000= 37000

PAT = EBIT*(1-t) = 37000*(1-.4) = 22200

hence incremental cash flows for year 1 = PAT + depreciation = 22000+ 38000

= $60,200 ---option (C)

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