Your company is considering the purchase of a new machine. The original cost of the old machine was $75,000; it is now five 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 salvage value 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 six 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 value is zero. Expected before-tax cash savings from the new machine are $10,000 a year over its full MACRS depreciable life. Depreciation is computed using MACRS over a five-year life, and the cost of capital is 9 percent. Assume a 21 percent tax rate. What will the year 1 operating cash flow for this project be?
A) $3,300
B) $4,236
C) $8,845
D) $13,200

Question

Quizplus · Accepted Answer

The year 1 operating cash flow is calculated as follows: Operating cash flow = (Savings - Depreciation) * (1 - Tax rate) + Depreciation. The MACRS depreciation for year 1 is 20% of $60,000, which is $12,000. Therefore, Operating cash flow = ($10,000 - $12,000) * (1 - 0.21) + $12,000 = $8,845.

Your Company Is Considering the Purchase of a New Machine