Your Company Is Considering the Purchase of a New Machine

question 42

Multiple Choice

Your company is considering the purchase of a new machine. The original cost of the old machine was $75,000; it is now 5 years old, and it has a current market value of $20,000. The old machine is being depreciated over a 10-year life toward a zero estimated salvage value on a straight-line basis, resulting in a current book value of $37,500 and an annual depreciation expense of $7,500. The old machine can be used for 6 more years but has no market value after its depreciable life is over. Management is contemplating the purchase of a new machine whose cost is $60,000 and whose estimated salvage value is zero. Expected before-tax cash savings from the new machine are $10,000 a year over its full MACRS depreciable life. Depreciation is computed using MACRS over a 5-year life, and the cost of capital is 9 percent. Assume a 40 percent tax rate. What will the year 1 operating cash flow for this project be?

• A) $3,300
• B) $4,236
• C) $7,800
• D) $13,200

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Definitions:

Random Variable

A mathematical variable with numerical outputs originating from random incidents.

Major Organic Product

The major organic product is the primary substance produced in a chemical reaction involving organic compounds, usually present in the largest amount compared to other products.

Organic Reaction

A chemical reaction involving organic compounds, where the reactants undergo a chemical change to produce new organic products.

Major Organic Product

The primary product resulting from a chemical reaction, especially in the context of organic synthesis and reaction mechanisms.