Propell Inc.is considering the purchase of a new machine that will cost $178,000,plus an additional $12,000 to ship and install.The new machine will have a 5-year useful life and will be depreciated using the straight-line method.The machine is expected to generate new sales of $85,000 per year and is expected to increase operating costs by $10,000 annually.Propell's income tax rate is 40%.What is the projected incremental cash flow of the machine for year 1?

Question

Quizplus · Accepted Answer

To calculate the incremental cash flow for year 1, we need to consider the following cash inflows and outflows:

Cash inflows:
- New sales generated by the machine: $85,000

Cash outflows:
- Cost of the machine: $178,000
- Shipping and installation cost: $12,000
- Increase in operating costs: $10,000
- Depreciation expense: $35,200 ($190,000 / 5 years)

To calculate the incremental cash flow, we subtract the cash outflows from the cash inflows:

$85,000 - ($178,000 + $12,000 + $10,000 + $35,200) = $60,200

Therefore, the projected incremental cash flow of the machine for year 1 is $60,200. The best choice is B.