Question

A $64,000 machine with a 6-year class life was purchased 2 years ago. The machine will now be sold for $50,000 and replaced with a new machine costing $89,000, with a 10-year class life. The new machine will not increase sales, but will decrease operating costs by $14,000 per year. Simplified straight line depreciation is employed for both machines, and the marginal corporate tax rate is 34 percent. What is the incremental annual cash flow associated with the project

Answer 1

$8,639

Step-by-step explanation:

The computation of the incremental annual cash flow is shown below:

= Increase in cash flows due to decrease in expenses × (1 -tax rate)+ Depreciation benefit × tax rate

= $14,000 × (1 - 0.34) + -$1,767 × (0.34)

= $9,240 - $600.78

= $8,639

Working note

Depreciation benefit = Depreciation on new machine - Depreciation on the old machine

= $89,000 ÷ 10 years - $64,000 ÷ 6 years

= $8,900 - $10,667

= -$1,767