Question

In four 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 percent. What is the free cash flow for year 4? Multiple choice question. $13,100 $11,600 $8,400 $9,200

Answer 1

To calculate the free cash flow for year 4, we need to consider the incremental depreciation, tax rate, and the cash flows associated with the new machine. The free cash flow for year 4 is $11,645.

Step-by-step explanation:

To calculate the free cash flow for year 4, we need to consider the incremental depreciation, tax rate, and the cash flows associated with the new machine.

1. Start by calculating the cash flow from the incremental depreciation, which is $5,300. This represents the reduction in the book value of the new machine in year 4.

2. Next, calculate the tax benefit from the incremental depreciation. Multiply the incremental depreciation by the tax rate (35%): $5,300 * 35% = $1,855.

3. Subtract the tax benefit from the incremental depreciation to get the net cash flow from the incremental depreciation: $5,300 - $1,855 = $3,445.

4. Finally, add the net cash flow from the incremental depreciation to the cash flow from the lower variable costs ($8,200) to get the total free cash flow for year 4: $3,445 + $8,200 = $11,645.

Therefore, the free cash flow for year 4 is $11,645.