Stanton Inc. is considering the purchase of a new machine, which will reduce manufacturing costs by $5,000 annually and increase earnings before depreciation and taxes by $6,000 annually. Stanton will use the MACRS method to depreciate the machine, and it has estimated the depreciation expense for the first year as $8,000. Which of the following is the supplemental operating cash flow for the first year if Stanton's marginal tax rate is 40 percent?
A) $15,000
B) $23,000
C) $40,000
D) $9,800
E) $4,500

Question

Quizplus · Accepted Answer

Supplemental operating cash flow can be calculated using the following formula:

Supplemental operating cash flow = Earnings before Depreciation and Taxes (EBDT) + Depreciation - Taxes on Gain from Sale of Asset

EBDT = $6,000
Depreciation = $8,000 (according to MACRS)
Taxes on Gain from Sale of Asset = $0 (because there is no sale of asset)

So, the supplemental operating cash flow for the first year is:

Supplemental operating cash flow = $6,000 + $8,000 - ($6,000 - $8,000) x 40% = $9,800.

Therefore, the correct answer is D) $9,800.