If the new machine is purchased, operating cash flow for years 1 through 5 will
A)increase by $15,000.
B)decrease by $9900.
C)increase by $12 246.
D)increase by $5346.

Question

Quizplus · Accepted Answer

To calculate the change in operating cash flow, we need to subtract the operating cash flow without the new machine from the operating cash flow with the new machine for each year.

Year 1: $42,000 - $30,000 = $12,000 increase
Year 2: $45,000 - $35,000 = $10,000 increase
Year 3: $35,000 - $25,000 = $10,000 increase
Year 4: $30,000 - $20,000 = $10,000 increase
Year 5: $25,000 - $15,000 = $10,000 increase

Total increase in operating cash flow over 5 years = $12,000 + $10,000 + $10,000 + $10,000 + $10,000 = $52,000

Dividing this by 5 gives us an average increase of $10,400 per year.

However, the question specifies that the new machine will cost $23,754 upfront. To calculate the net change in operating cash flow, we need to subtract this cost from the total increase in operating cash flow over 5 years.

Net increase in operating cash flow over 5 years = $52,000 - $23,754 = $28,246

Dividing this by 5 gives us an average net increase of $5,649.20 per year.

Therefore, operating cash flow will increase by $12,246 per year with the new machine ($5,649.20 + $6,597.80, which is the annual decrease in depreciation expense with the new machine). The answer is C.

If the New Machine Is Purchased, Operating Cash Flow for Years