The management of Jasper Equipment Company is planning to purchase a new milling machine that will cost $160,000 installed. The old milling machine has been fully depreciated but can be sold for $15,000. The new machine will be depreciated on a straight-line basis over its 10-year economic life to an estimated salvage value of $10,000. If this milling machine will save Jasper $20,000 a year in production expenses, what are the annual net cash flows associated with the purchase of this machine? Assume a marginal tax rate of 40 percent.

Question

Quizplus · Accepted Answer

The annual net cash flow is $18,000. This is calculated as follows:$20,000 (savings) - $8,000 (depreciation) = $12,000 (operating cash flow) + $15,000 (sale of old machine) - $160,000 (cost of new machine) = -$133,000 (initial investment)$12,000 (operating cash flow) + $15,000 (sale of old machine) - $8,000 (depreciation) = $18,000 (annual net cash flow)

The Management of Jasper Equipment Company Is Planning to Purchase