The Ace Dairy Corporation is considering the purchase of a new machine that will cost $91,000. The machine is expected to increase revenues by $27,000 a year and cash expenses by
$8,000. The machine will be depreciated using straight-line depreciation under IRS rules over
7 years. The firm pays taxes at a marginal rate of 40%. Calculate the incremental annual cash
Flows if Ace Dairy purchases the machine.

Question

Quizplus · Accepted Answer

The incremental annual cash flow is calculated as follows:  Incremental Revenue = $27,000  Incremental Expenses = $8,000  Depreciation = $91,000 / 7 = $13,000  Taxable Income = Incremental Revenue - Incremental Expenses - Depreciation = $27,000 - $8,000 - $13,000 = $6,000  Taxes = Taxable Income * Tax Rate = $6,000 * 40% = $2,400  Net Income = Taxable Income - Taxes = $6,000 - $2,400 = $3,600  Add back Depreciation (non-cash expense) = $3,600 + $13,000 = $16,600  Therefore, the incremental annual cash flow is $16,600.

The Ace Dairy Corporation Is Considering the Purchase of a New