Moon Pie Company is considering automated baking equipment that costs $500,000 installed and would replace the present handmade production method. The present equipment has a zero book and salvage value. The new equipment will not increase revenues but will reduce operating costs from a current level of $600,000 to $300,000 per year. The depreciation of the new equipment will be $73,000 per year. What are the annual incremental net cash flows? Assume a marginal tax rate of 40 percent.
A) $296,800
B) $136,200
C) $192,200
D) $209,200

Question

Quizplus · Accepted Answer

The annual incremental net cash flows are calculated as follows: Savings in operating costs ($600,000 - $300,000 = $300,000) minus tax on savings (40% of $300,000 = $120,000) plus tax shield from depreciation (40% of $73,000 = $29,200). Therefore, the net cash flow is $300,000 - $120,000 + $29,200 = $209,200.

Moon Pie Company Is Considering Automated Baking Equipment That Costs