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 $25,000; it is now five years old, and it has a current market value of $10,000. 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 $12,500 and an annual depreciation expense of $2,500. 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 $20,000 and whose estimated salvage value is zero. Expected before-tax cash savings from the new machine are $3,500 a year over its full MACRS depreciable life. Depreciation is computed using MACRS over a five-year life, and the cost of capital is 13 percent. Assume a 40 percent tax rate. What will the year 1 operating cash flow for this project be?

• A)$984
• B)$1,200
• C)$2,700
• D)$5,000

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Definitions:

Labor Force Participation

The percentage of the working-age population that is either employed or actively seeking employment.

Married Women

Refers to women who are legally united in marriage and the various societal, economic, and legal implications that status entails.

Education

The systematic process of facilitating learning, acquiring knowledge, skills, values, beliefs, and habits.

Personal Income

The total annual income received by an individual, including wages, dividends, interest, and any other sources of income before taxes.