A company is considering investing in a piece of machinery costing $400,000.The investment will provide an additional $142,000 in additional sales each year and its annual cash operating expenses are expected to be $51,000.The machine will be depreciated on a straight-line basis over an 8-year life with no estimated salvage value.The company has a 40% tax rate.How much are annual operating cash flows?

Question

Quizplus · Accepted Answer

Annual operating cash flows can be calculated as follows:

Additional sales revenue = $142,000
Less: Cash operating expenses = $51,000
Less: Depreciation expense = ($400,000 / 8) = $50,000
Taxable income = $41,000
Tax expense (40%) = $16,400

Annual operating cash flow = $142,000 - $51,000 - $50,000 - $16,400 = $24,600

Therefore, the correct answer is D.

A Company Is Considering Investing in a Piece of Machinery