Question

In 4 years, an existing machine will have a zero book value and a market value of $4,200. A new machine costing $26,400 can replace this machine, lower variable costs by $8,200 a year, and have a market value of $13,300 and a zero book value in 4 years. The incremental depreciation is $5,300. The tax rate is 35%. What is the operating cash flow for year 4?

Answer 1

To calculate the operating cash flow for year 4, we need to consider the incremental depreciation, the tax rate, and the changes in the market value and variable costs. The operating cash flow for year 4 is $17,763.75.

Step-by-step explanation:

To calculate the operating cash flow for year 4, we need to consider the incremental depreciation, the tax rate, and the changes in the market value and variable costs.

The operating cash flow for year 4 can be calculated as follows:

Calculate the annual depreciation expense by dividing the incremental depreciation by the useful life of the machine. In this case, the useful life is 4 years, so the annual depreciation expense is $5,300 / 4 = $1,325.

Calculate the tax shield from depreciation by multiplying the annual depreciation expense by the tax rate. In this case, the tax rate is 35%, so the tax shield is $1,325 * 0.35 = $463.75.

Calculate the change in variable costs by subtracting the lower variable costs of the new machine from the variable costs of the existing machine. In this case, the change in variable costs is $8,200 - $0 = $8,200.

Calculate the change in market value by subtracting the market value of the existing machine from the market value of the new machine. In this case, the change in market value is $13,300 - $4,200 = $9,100.

Calculate the operating cash flow by summing the tax shield from depreciation, the change in variable costs, and the change in market value. In this case, the operating cash flow for year 4 is $463.75 + $8,200 + $9,100 = $17,763.75.