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.