Clementine Company Is Considering the Purchase of a New Machine

question 102

Multiple Choice

Clementine Company is considering the purchase of a new machine for $160,000. The machine would generate an annual cash flow before depreciation and taxes of $62,588 for four years. At the end of four years, the machine would have no salvage value. The company's cost of capital is 12 percent. The company uses straight-line depreciation with no mid-year convention and has a 40 percent tax rate. What is the annual net after-tax cash flow per year?

• A)$62,588
• B)$53,553
• C)$37,552
• D)$16,000

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Definitions:

Prepaid Items

Expenses paid in advance and recorded as assets until they are used or consumed.

Expense Accounts

Accounts used in accounting to track money spent or costs incurred in a company's operations to generate revenue, typically categorized by the nature of the expenses.

Liability Accounts

Accounts that represent amounts owed to others, including loans, accounts payable, and mortgages.

Depreciation

The process of allocating the cost of a tangible asset over its useful life, recognizing the consumption, wear and tear, or obsolescence of physical or fixed assets used in operations.