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Your Company Is Considering the Purchase of a New Machine

question 45

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 five 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 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 $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 five-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?

Definitions:

Forming Department

A division within a manufacturing process where raw materials begin their transformation into finished products, typically through shaping or molding.

Materials Cost

The total expense of materials used in the production of a product, including direct materials and any additional materials necessary for production.

Conversion Costs

The combined costs of direct labor and manufacturing overheads incurred to convert raw materials into finished goods.

Weighted-Average Method

An inventory costing method that calculates the cost of goods sold and ending inventory based on the average cost of all inventory items, weighted by the quantity of each item.