Marc Corporation wants to purchase a new machine for $400,000.Management predicts that the machine can produce sales of $275,000 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 company uses MACRS for depreciation.The machine is considered as a 3-year property and is not expected to have any significant residual at the end of its useful years.Marc's income tax rate is 40%.Management requires a minimum of 10% return on all investments.A partial MACRS depreciation table is reproduced below.
What is the after-tax cash inflow in Year 1 from the investment (rounded to the nearest thousand)?

Question

Marc Corporation wants to purchase a new machine for $400,000.Management predicts that the machine can produce sales of $275,000 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 company uses MACRS for depreciation.The machine is considered as a 3-year property and is not expected to have any significant residual at the end of its useful years.Marc's income tax rate is 40%.Management requires a minimum of 10% return on all investments.A partial MACRS depreciation table is reproduced below. 
What is the after-tax cash inflow in Year 1 from the investment (rounded to the nearest thousand)?

Quizplus · Accepted Answer

Let's calculate the after-tax cash inflow in Year 1 step by step.

1. Tax Depreciation: Since the machine is a 3-year property, we will follow the MACRS depreciation table for 3-year property. The depreciation rate for Year 1 is 33.33% (based on the partial MACRS depreciation table given in the question). Therefore, tax depreciation for Year 1 = $400,000 x 33.33% = $133,320.

2. Pretax Income: Pretax Income = Sales - Expenses - Depreciation = $275,000 - $80,000 - $133,320 = $61,680

3. Income Tax: Income tax = Pretax Income x Tax rate = $61,680 x 40% = $24,672

4. After-tax Cash Inflow: After-tax Cash Inflow = Pretax Income - Income tax + Tax Depreciation = $61,680 - $24,672 + $133,320 = $170,328

Rounded to the nearest thousand, the after-tax cash inflow in Year 1 from the investment is $170,000. Therefore, the best choice is C.

Marc Corporation Wants to Purchase a New Machine for $400,000