Al's Fabrication Shop Is Purchasing a New Rivet Machine to Replace

question 93

Multiple Choice

Al's Fabrication Shop is purchasing a new rivet machine to replace an existing one. The new machine costs $8,000 and will require an additional cost of $1,000 for modification and training. It will be depreciated using simplified straight line depreciation over five years. The new machine operates much faster than the old machine and with better quality. Consequently, sales are expected to increase by $2,100 per year for the next five years. While it is faster, it is fully automated and will result in increased electricity costs for the firm by $700 per year. It will, however, save about $850 per year in labor costs. The old machine is 20 years old and has already been fully depreciated. If the firm's marginal tax rate is 28%, compute the after tax incremental cash flows for the new machine for years 1 through 5.

• A) $2,698
• B) $450
• C) $2,124
• D) $1,620

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Definitions:

Priority

The established order of importance or precedence, often used in contexts where resources are limited or decisions must be made based on urgency.

Equity of Redemption

A mortgagor’s right to pay off the mortgage in full, including interest.

Mortgagor

A borrower in a mortgage agreement who uses property as security for a loan.

Mortgagee

The mortgagee is the lender in a mortgage agreement, typically a financial institution, who lends money to the borrower (mortgagor) for purchasing real estate.