Outback is purchasing a new machine that will cost $98,000. The machine will qualify as MACRS 5-year property but has an economic life of 8 years. The new machine is expected to increase revenues by $35,000 per year, and operating costs are expected to increase by $15,000 per year. If the firm's marginal tax rate is 34 percent and the first year's depreciation rate is 20 percent, what is the net cash flow in the first year.

Question

Quizplus · Accepted Answer

The net cash flow in the first year can be calculated as follows:1. Incremental revenue: $35,0002. Incremental operating costs: -$15,0003. Depreciation expense: $98,000 * 20% = $19,600So, the operating income before taxes is $35,000 - $15,000 - $19,600 = $400.The tax on this operating income is $400 * 34% = $136.Therefore, the after-tax operating income is $400 - $136 = $264.The net cash flow is the after-tax operating income plus the depreciation expense, which is $264 + $19,600 = $19,864.

Outback Is Purchasing a New Machine That Will Cost $98,000