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?

• A)$3,300
• B)$4,236
• C)$7,800
• D)$13,200

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Definitions:

Severe Arthritis

A form of arthritis characterized by intense pain, stiffness, and swelling in the joints, resulting in significant impairment of daily activities and mobility.

Joint Deformity

A condition involving abnormality in the shape, structure, or position of a joint, often resulting from diseases like arthritis or injury.

Lung Expansion

A process or intervention aiming to increase lung volume and improve oxygenation, often involving breathing exercises, physical therapy, or medical devices.

Sitting Position

A way of arranging the body with the weight resting on the buttocks and the back straight, often used to promote good posture or for work at a desk.