Colors and More is considering replacing the equipment it uses to produce crayons. The equipment would cost $1.03 million, have a 12-year life, and lower manufacturing costs by an estimated $280,000 a year. The equipment will be depreciated using straight-line depreciation over its expected life to a book value of zero. Ignore bonus depreciation. The required rate of return is 13 percent and the tax rate is 23 percent. What is the annual operating cash flow?

Question

Quizplus · Accepted Answer

The annual operating cash flow is calculated as follows: First, calculate the annual depreciation expense, which is $1.03 million / 12 years = $85,833.33. The tax shield from depreciation is $85,833.33 * 23% = $19,741.67. The after-tax savings from lower manufacturing costs is $280,000 * (1 - 23%) = $215,600. The total annual operating cash flow is $215,600 + $19,741.67 = $235,341.67.

Colors and More Is Considering Replacing the Equipment It Uses