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

---

Definitions:

Per-unit Cost

The cost associated with producing or acquiring one unit of a product.

Factory Size

The physical dimensions or capacity of a manufacturing facility, which may influence its output, efficiency, and employment levels.

Average Costs

The total cost of production divided by the number of goods produced, used to calculate the cost on a per-unit basis.

Diseconomies of Scale

A condition in which a company or business grows so large that the costs per unit increase.