A Firm Is Evaluating a New Machine to Replace an Existing

question 24

Multiple Choice

A firm is evaluating a new machine to replace an existing, older machine.The old (existing) machine is being depreciated at $20,000 per year, whereas the new machine's depreciation will be $18,000.The firm's marginal tax rate is 30 percent.Everything else equal, if the new machine is purchased, what effect will the change in depreciation have on the firm's incremental operating cash flows?

• A)There should be no effect on the firm's cash flows, because depreciation is a noncash expense.
• B)Operating cash flows will increase by $2,000.
• C)Operating cash flows will increase by $1,400.
• D)Operating cash flows will decrease by $600.
• E)None of the above is correct.

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Definitions:

Wage Rate

The fixed amount of compensation or payment received by an employee from an employer in exchange for work performed.

Market Quantity

The total amount of a good or service that is bought and sold in a market.

Marginal Expenditure

The additional cost incurred by producing one more unit of a good or service.

Average Expenditure

The total amount spent on a specific good or service divided by the quantity purchased, indicating the average amount an individual pays for a unit of that good or service.