Homer Corp.is considering the purchase of a new piece of equipment.The cost savings from the equipment would result in an annual increase in net income after tax of $100,000.The equipment will have an initial cost of $400,000 and have a 5-year life.If the salvage value of the equipment is estimated to be $75,000,what is the annual net cash flow?

Question

Quizplus · Accepted Answer

The annual net cash flow from the equipment can be calculated by adding the annual increase in net income after tax to the annualized salvage value. The annual increase in net income is $100,000. The salvage value of $75,000, spread over 5 years, adds $15,000 per year ($75,000 / 5 years). Therefore, the total annual net cash flow is $100,000 (annual savings) + $15,000 (annualized salvage value) = $115,000. However, the initial cost is not considered in the annual net cash flow calculation as it is a one-time expense. Thus, the correct calculation for annual net cash flow should only consider the annual increase in net income, which is $100,000, indicating a mistake in my explanation. The correct approach to calculate the annual net cash flow should include the depreciation of the initial cost, but since the question asks for the net cash flow directly derived from the savings and salvage value, my initial calculation was incorrect. The correct answer should reflect the net cash flow from operations and salvage, not including the depreciation or initial cost directly.