Your company is considering the purchase of a new machine. The original cost of

Question

Your company is considering the purchase of a new machine. The original cost of the old machine was $75,000; it's 5 years old, and it has a current market value of $20,000. The old machine is being depreciated over a 10-year life toward a zero estimated salvagevalue on a straight-line basis, resulting in a current book value of $37,500 and an annual depreciation expense of $7,500. The old machine can be used for 6 more years but has no market value after its depreciable life is over. Management is contemplating the purchase of a new machine whose cost is $60,000 and whose estimated salvage is zero. Expected before-tax cash savings from the new machine are $10,000a year over its full MACRS depreciable life. Depreciation is computed using MACRS over a 5-year life, and the cost of capitial is 9 percent. Assume a 40 percent tax rate. What will the year 1 operating cash flow for this project be?

The options for this multiple choice question are either A) 4,236 B)13,200 C)3,300 D)7,800 please show how you arrived at the correct answer.

THANK YOU

Explanation / Answer

after tax savings of newmachine = 10000 * (1-0.4) = 6000

new depriciation = 0.2 * 60000 = 12000

change in depriciation = 12000 - 7500 = 4500

tax savingsfrom depriciation = 4500 * 0.4 = 1800

operational cash ofyear 1 = 6000 + 1800 = 7800

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.