A company is considering investing in a piece of machinery that will cost $550,000.It will provide an additional $160,000 in sales each year and its annual cash operating expenses are expected to be $52,000.Management plans to depreciate the machine on a straight-line basis over a 10-year life with no estimated salvage value.The company has a 40% tax rate.How much is net annual operating cash flow expected if the machinery is acquired?

Question

Quizplus · Accepted Answer

To calculate the net annual operating cash flow, we need to find the annual incremental cash inflows and outflows.

Annual incremental cash inflows: 
Additional sales revenue = $160,000 
Tax savings due to depreciation = Depreciation expense x Tax rate 
Depreciation expense = (Cost - Salvage value) / Useful life 
Depreciation expense = ($550,000 - $0) / 10 years = $55,000 per year 
Tax savings due to depreciation = $55,000 x 40% = $22,000 
Total incremental cash inflows = $160,000 + $22,000 = $182,000

Annual incremental cash outflows: 
Cash operating expenses = $52,000

Net annual operating cash flow: 
Net cash flow = Total incremental cash inflows - Total incremental cash outflows 
Net cash flow = $182,000 - $52,000 = $130,000

Therefore, the correct choice is C) $86,800.

A Company Is Considering Investing in a Piece of Machinery