PDF CorpNeeds to Replace an Old Lathe with a New,more Efficient

question 84

Multiple Choice

PDF Corp.needs to replace an old lathe with a new,more efficient model.The old lathe was purchased for $50,000 nine years ago and has a current book value of $5,000.(The old machine is being depreciated on a straight-line basis over a ten-year useful life.) The new lathe costs $100,000.It will cost the company $10,000 to get the new lathe to the factory and get it installed.The old machine will be sold as scrap metal for $2,000.The new machine is also being depreciated on a straight-line basis over ten years.Sales are expected to increase by $8,000 per year while operating expenses are expected to decrease by $12,000 per year.PDF's marginal tax rate is 40%.Additional working capital of $3,000 is required to maintain the new machine and higher sales level.The new lathe is expected to be sold for $5,000 at the end of the project's ten-year life.What is the incremental free cash flow during year 1 of the project?

• A) $12,800
• B) $14,400
• C) $11,400
• D) $15,200

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Definitions:

Annuity Due

A type of annuity with payments made at the beginning of each period, rather than at the end, typically utilized in lease and loan agreements.

End-of-Period Payments

Payments made at the conclusion of a payment period, commonly used in the context of loans or leases.

Starting Immediately

Indicates that an action or process is to begin right away, without delay.

Perpetuity

A type of financial asset that generates a never-ending stream of cash flows or payments with no expiration date.