A Firm Is Evaluating a New Machine to Replace One

question 8

Multiple Choice

A firm is evaluating a new machine to replace one of its existing, older machines. If the old machine is replaced, the change in the annual depreciation expense will be $3,000. The firm's marginal tax rate is 30 percent. Which of the following statements is correct?

• A)The depreciation expense does not affect the calculation of the supplemental operating cash flows, so it should not be considered in the analysis of the machine.
• B)The depreciation expense can be added to the machine's after-tax net operating income to determine its supplemental operating cash flows.
• C)The depreciation expense should be added to the machine's initial investment outlay.
• D)The depreciation expense is included in the computation of the machine's terminal cash flows.
• E)The depreciation expense should be included in the analysis only if it exceeds the tax expense associated with the machine.

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Definitions:

Total Assets

The complete sum of everything a company owns or controls that has economic value, shown on the balance sheet.

Owner's Equity

Owner's equity is the residual interest in the assets of the entity after deducting liabilities, representing what the owners or shareholders own outright.

Total Liabilities

The combined amount of all debts and other financial obligations owed by an entity at a given time.

Liabilities

Financial obligations owed by a business to others, such as loans, accounts payable, and mortgages, which must be paid in the future.