Quip Corporation wants to purchase a new machine for $300,000. Management predicts that the machine will produce sales of $200,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The firm uses straight-line depreciation with an assumed residual (salvage) value of $50,000. Quip's combined income tax rate, t, is 40%.

What is the net after-tax cash inflow in Year 1 from the proposed investment, rounded to the nearest whole dollar?
A) $72,000.
B) $92,000.
C) $96,000.
D) $102,000.
E) $120,000.

Question

Quip Corporation wants to purchase a new machine for $300,000. Management predicts that the machine will produce sales of $200,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The firm uses straight-line depreciation with an assumed residual (salvage) value of $50,000. Quip's combined income tax rate, t, is 40%.

What is the net after-tax cash inflow in Year 1 from the proposed investment, rounded to the nearest whole dollar?

What is the net after-tax cash inflow in Year 1 from the proposed investment, rounded to the nearest whole dollar?
A) $72,000.
B) $92,000.
C) $96,000.
D) $102,000.
E) $120,000.

Quizplus · Accepted Answer

To calculate the net after-tax cash inflow in Year 1, follow these steps:1. Calculate the annual depreciation: (Cost of the machine - Salvage value) / Useful life = ($300,000 - $50,000) / 5 = $50,000 per year.2. Calculate the operating income before taxes: Sales - Expenses - Depreciation = $200,000 - $80,000 - $50,000 = $70,000.3. Calculate the tax on the operating income: $70,000 * 40% = $28,000.4. Calculate the net operating income after taxes: $70,000 - $28,000 = $42,000.5. Add back the depreciation (since it's a non-cash expense) to get the net after-tax cash inflow: $42,000 + $50,000 = $92,000.Therefore, the correct answer is $92,000, which is option B.

Quip Corporation Wants to Purchase a New Machine for $300,000