Use the following information to answer the following question(s).
A firm is trying to determine whether to replace an existing asset.The proposed asset has a purchase price of $50,000 and has installation costs of $3,000.The asset will be depreciated over its five-year useful life using the straight-line method.The new asset is expected to increase sales by $17,000 and non-depreciation expenses by $2,000 annually over the useful life of the asset.Due to the increase in sales,the firm expects an increase in working capital during the asset's useful life of $1,500,and the firm expects to be able to sell the asset for $6,000 at the end of its useful life.The existing asset was originally purchased three years ago for $25,000,has a remaining useful life of five years,and is being depreciated using the straight-line method.The expected salvage value at the end of the asset's useful life (i.e. ,five years from now)is $5,000;however,the current sale price of the existing asset is $20,000,and its current book value is $15,625.The firm's marginal tax rate is 34 percent and its required rate of return is 12 percent.
-If the new machine is purchased,depreciation expense will
A)increase by $8,000.
B)increase by $6,900.
C)increase by $6,300.
D)decrease by $5,000.

Question

Quizplus · Accepted Answer

Depreciation expense for the new asset will be ($50,000+$3,000-$6,000)/5=$9,400 per year. 
The increase in non-depreciation expenses is $2,000 per year. 
Therefore, the total annual expense increase is $11,400. 
Since the tax rate is 34 percent, the annual tax savings due to the expense increase is $11,400x0.34=$3,876. 
Therefore, the net cash flow each year due to the new asset is ($17,000+$3,876+$1,500)=$22,376. 
The present value of this annuity is $77,097. 
The net present value of the new asset is ($50,000+$3,000)-$77,097=-$24,097. 
Therefore, the company should not replace the existing asset. 
If the new machine is purchased, the depreciation expense will increase by $9,400 per year. 
However, if the existing asset is kept, the depreciation expense will be ($25,000-$5,000)/5=$4,000 per year. 
Therefore, the depreciation expense will increase by $5,400 ($9,400-$4,000) if the new machine is purchased. 
Therefore, the correct answer is B.

Use the Following Information to Answer the Following Question(s)