AFB CorpNeeds to Replace an Old Lathe with a New,more Efficient

question 49

Multiple Choice

AFB Corp.needs to replace an old lathe with a new,more efficient model.The old lathe was purchased for $50,000 nine years ago and has a current book value of $5,000.(The old machine is being depreciated on a straight-line basis over a ten-year useful life.) The new lathe costs $100,000.It will cost the company $10,000 to get the new lathe to the factory and get it installed.The old machine will be sold as scrap metal for $2,000.The new machine is also being depreciated on a straight-line basis over ten years.Sales are expected to increase by $8,000 per year while operating expenses are expected to decrease by $12,000 per year.AFB's marginal tax rate is 40%.Additional working capital of $3,000 is required to maintain the new machine and higher sales level.The new lathe is expected to be sold for $5,000 at the end of the project's ten-year life.What is the project's terminal cash flow?

• A) $3,000
• B) $5,000
• C) $6,000
• D) $8,000

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Definitions:

Cash Basis

An accounting method where revenues and expenses are recognized only when cash is received or paid, regardless of when the transaction occurred.

Financial Statements

Papers presenting a snapshot of a firm's financial health, which include the balance sheet, income statement, and cash flow statement.

Accurate

The quality of being precise, correct, and free from errors.

Adjust Expense

The process of allocating expenses incurred in one period to the correct period, often through adjusting entries in the accounting records.