ABC Will Purchase a Machine That Will Cost $2,575,000

question 79

Multiple Choice

ABC will purchase a machine that will cost $2,575,000. Required modifications will cost $375,000. ABC will need to invest $75,000 for additional inventory. The machine has an IRS approved useful life of 7 years; it is presumed to have no salvage value. ABC plans to depreciate the machine by using the straight-line method. The machine is expected to increase ABC's sales revenues by $1,890,000 per year; operating costs excluding depreciation are estimated at $454,600 per year. Assume that the firm's tax rate is 40%. What is the annual operating cash flow?

• A) $922,464
• B) $1,126,287
• C) $813,563
• D) $1,029,811

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Definitions:

Discontinues

The process of ceasing production, support, or sale of a product or service.

Income Statement

A financial statement that shows a company's revenues and expenses over a specific period of time.

Continuing Operations

The segments or units of a business that are expected to continue operations into the foreseeable future, as opposed to those segments that are being discontinued or sold.

Comparative Financial Statements

Financial statements that provide a comparison of a company's financial performance and position over multiple periods.