A new replacement machine is being considered that will save $105,000 per year in labor cost and $20,000 on maintenance. The company's marginal tax rate is 34%. The replacement will also generate a tax savings from depreciation of $5,000. Estimate the incremental cash flow for the first year associated with buying the new machine.
A)$87,500
B)$82,500
C)$42,500
D)$51,100

Question

A new replacement machine is being considered that will save $105,000 per year in labor cost and $20,000 on maintenance. The company's marginal tax rate is 34%.  The replacement will also generate a tax savings from depreciation of $5,000. Estimate the incremental cash flow for the first year associated with buying the new machine.
A)$87,500
B)$82,500
C)$42,500
D)$51,100

Quizplus · Accepted Answer

The incremental cash flow is calculated as: (Labor savings + Maintenance savings) * (1 - Tax rate) + Depreciation tax shield = ($105,000 + $20,000) * (1 - 0.34) + $5,000 = $87,500.

A New Replacement Machine Is Being Considered That Will Save