Stanton Inc. is considering the purchase of a new machine that will reduce manufacturing costs by $5,000 annually and increase earnings before depreciation and taxes by $6,000 annually. Stanton will use the Modified Accelerated Cost Recovery System (MACRS) method to depreciate the machine, and it has estimated the depreciation expense for the first year as $8,000. Which of the following is the supplemental operating cash flow for the first year? Stanton's marginal tax rate is 40 percent.
A)$19,000
B)$7,800
C)$6,600
D)$9,800
E)$3,000

Question

Stanton Inc. is considering the purchase of a new machine that will reduce manufacturing costs by $5,000 annually and increase earnings before depreciation and taxes by $6,000 annually. Stanton will use the Modified Accelerated Cost Recovery System (MACRS) method to depreciate the machine, and it has estimated the depreciation expense for the first year as $8,000. Which of the following is the supplemental operating cash flow for the first year? Stanton's marginal tax rate is 40 percent. 
A)$19,000
B)$7,800
C)$6,600
D)$9,800
E)$3,000

Quizplus · Accepted Answer

Supplemental operating cash flow is calculated as Earnings before Depreciation and Taxes (EBDT) plus Depreciation minus Taxes.

EBDT = $6,000

Depreciation = $8,000 according to MACRS method

Taxes = (EBDT - Depreciation) x Tax rate

Taxes = ($6,000 - $8,000) x 40% = -$800

Thus, the supplemental operating cash flow for the first year can be calculated as follows:

Supplemental operating cash flow = EBDT + Depreciation - Taxes = $6,000 + $8,000 - (-$800) = $9,800.

Therefore, the correct answer is D) $9,800.