Question

Cortland Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in net cash flows of $148,400. The equipment will have an initial cost of $530,000 and have a 5-year life. If the salvage value of the equipment is estimated to be $12,000, what is the annual net income? Ignore income taxes.

Answer 1

Net yearly income= $44,800

Step-by-step explanation:

Depreciation can be defined as a reduction in the value of an asset over a certain period that is referred to as its useful life.

Depreciation expense reduces yearly income.

The yearly depreciation can be compared to yearly Revenue earned by its use to get net income.

Depreciation = (Value of asset - Salvage value) ÷ Number of useful years

Depreciation= (530,000 - 12,000) ÷ 5

Depreciation= $103,600

The yearly Revenue generated by using the asset is $148,400

Net yearly income= Increased cash flow - Depreciation

Net yearly income = 148,400 - 103,600

Net yearly income= $44,800

Answer 2

$44,800

Step-by-step explanation:

To calculate annual net income we need to deduct depreciation from the annual increase in net cash flows.

Depreciation is calculated on a straight line basis using the following formulae:

Asset cost - Salvage value / useful life

530,000 - 12,000 / 5 = $103,600

Annual Net Income = 148,400 - 103,600 = $44,800

Hence, annual net income is $44,800.