Your Company Is Considering the Purchase of a New Machine

question 98

Multiple Choice

Your company is considering the purchase of a new machine. The original cost of the old machine was $100,000; it is now five years old, and it has a current market value of $40,000. 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 $50,000 and an annual depreciation expense of $10,000. The old machine can be used for six 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 $80,000 and whose estimated salvage value is zero. Expected before-tax cash savings from the new machine are $13,000 a year over its full MACRS depreciable life. Depreciation is computed using MACRS over a five-year life, and the cost of capital is 10 percent. Assume a 40 percent tax rate. What will the year 1 operating cash flow for this project be?

• A)$2,200
• B)$4,900
• C)$10,200
• D)$14,200

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Definitions:

Domestic Policies

Government strategies and decisions primarily concerned with activities within a country's borders, such as social welfare, education, and healthcare.

Commerce Clause

A provision in the U.S. Constitution granting Congress the power to regulate trade between states, foreign nations, and Indian tribes.

Article I

Article I is the first section of the United States Constitution, establishing the legislative branch of the government, specifying the powers and structure of Congress.

Fourteenth Amendment

The Fourteenth Amendment to the U.S. Constitution grants citizenship to all persons born or naturalized in the U.S. and ensures equal protection under the law.