Jones Crusher Company Is Evaluating the Proposed Acquisition of a New

question 55

Multiple Choice

Jones Crusher Company is evaluating the proposed acquisition of a new machine. The machine will cost $190,000, and it will cost another $33,000 to modify it for special use by the firm. The machine falls into the MACRS 3-year class, and it will be sold after 3 years of use for $110,000. The machine will require an increase in net working capital of $9,000 and will have no effect on revenues, but is expected to save the firm $90,000 per year in before-tax operating costs, mainly labour. The company's marginal tax rate is 40%. What is the cash flow from the project for year 1? MACRS Depreciation Rates
$$\begin{array} { | c | c | r | } \hline \text { Year } & \text { 3-Year } & \text { 5-Year } \\\hline 1 & 33.33 \% & 20.00 \% \\\hline 2 & 44.45 \% & 32.00 \% \\\hline\end{array}$$

• A)$90,000
• B)$83,730
• C)$79,331
• D)$71,840
• E)$9,404

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Definitions:

Expected Price Level

The anticipated average level of prices in the economy, usually considered in terms of inflation or deflation expectations.

Capital Stock

The total amount of physical, human, and intangible assets that a firm uses to generate income, often referred to in the context of fixed capital like machinery and buildings.

Long-Run Aggregate Supply Curve

A vertical line representing the maximum amount of goods and services an economy can supply when it is fully employed, regardless of price levels in the long term.

Aggregate Demand Curve

A curve that illustrates the total demand for goods and services in an economy at various price levels.