Question

A company projects an increase in net income of $39800 each year for the next five years if it invests $498000 in new equipment. The equipment has a 5 -year life and an estimated salvage value of $49500. The company uses the straight-line method of depreciation. What is the net annual cash flow?

A. $89300
B. $139400
C. $129500
D. $39800

Answer 1

The net annual cash flow from the investment in new equipment is $129,500, which includes the projected net income and the non-cash depreciation expense.

Step-by-step explanation:

The student is asking about calculating the net annual cash flow from an investment in new equipment. To find this, we start with the projected increase in net income, which is $39,800 per year. However, the net cash flow is not simply the increase in net income, as we need to account for the depreciation expense associated with the new equipment. The equipment, costing $498,000 and with a salvage value of $49,500 over five years, will have an annual depreciation expense calculated using the straight-line method. The annual depreciation is ($498,000 - $49,500) / 5 = $89,700. The net annual cash flow is the projected increase in net income plus the annual depreciation since depreciation is a non-cash charge. Therefore, the net annual cash flow is $39,800 + $89,700 = $129,500.