Cortland 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 cash flows 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 income? Ignore income taxes.

Question

Quizplus · Accepted Answer

To find the annual net income, we need to calculate the annual depreciation expense using the straight-line method:

Depreciation expense = (Initial cost - Salvage value) / Useful life
Depreciation expense = ($400,000 - $75,000) / 5 = $65,000 per year

Therefore, the annual net income is:

Net income = Net cash flows - Depreciation expense
Net income = $100,000 - $65,000 = $35,000 per year

Option B provides the correct numerical value for the annual net income.