ABC will purchase a machine that will cost $2,575,000. Required modifications will cost $375,000. ABC will need to invest $75,000 for additional inventory. The machine has an IRS approved useful life of 7 years; it is presumed to have no salvage value. ABC plans to depreciate the machine by using the straight-line method. The machine is expected to increase ABC's sales revenues by $1,890,000 per year; operating costs excluding depreciation are estimated at $454,600 per year. Assume that the firm's tax rate is 40%. What is the annual operating cash flow?
A) $922,464
B) $1,126,287
C) $813,563
D) $1,029,811

Question

Quizplus · Accepted Answer

The annual operating cash flow can be calculated as follows: 1. Calculate the total initial cost of the machine, including modifications and additional inventory: $2,575,000 + $375,000 + $75,000 = $3,025,000.2. Calculate annual depreciation: $3,025,000 / 7 = $432,143.3. Calculate the operating income before taxes by subtracting operating costs and depreciation from sales revenues: $1,890,000 - $454,600 - $432,143 = $1,003,257.4. Calculate the tax on operating income: $1,003,257 * 40% = $401,303.5. Calculate the operating income after taxes: $1,003,257 - $401,303 = $601,954.6. Add back depreciation to get the annual operating cash flow: $601,954 + $432,143 = $1,034,097.The correct answer is not listed exactly, but the closest to the calculated value is D) $1,029,811.

ABC Will Purchase a Machine That Will Cost $2,575,000