Baker Company is considering an investment in a new metal lathe. If the new lathe is purchased, revenues will increase by $5,000 per year and cash operating costs will decline by $10,000 per year. The lathe will cost $60,000 and will be depreciated on a straight-line basis over 10 years to a zero estimated salvage value. Baker's marginal tax rate is 40%. Determine the annual net cash flows generated by the lathe.

Question

Quizplus · Accepted Answer

The annual net cash flows generated by the lathe can be calculated as follows:- Increase in revenues: $5,000- Decrease in cash operating costs: $10,000- Total increase in cash flow before taxes: $5,000 + $10,000 = $15,000- Depreciation expense: Cost of lathe / Useful life = $60,000 / 10 = $6,000- Tax savings due to depreciation: $6,000 * 40% = $2,400- Tax on increased cash flow: ($15,000 - $6,000) * 40% = $3,600- Net increase in cash flow after taxes: $15,000 - $3,600 = $11,400Thus, the annual net cash flows generated by the lathe are $11,400.

Baker Company Is Considering an Investment in a New Metal