Nickel Industries 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.Nickel's income tax rate is 40%.What is the projected incremental cash flow of the machine for year 1?

Question

Quizplus · Accepted Answer

The initial cash outflow is the cost of the machine plus shipping and installation, which is $178,000 + $12,000 = $190,000. 
The annual incremental cash inflow is the increase in sales minus the increase in operating costs, which is ($85,000 - $10,000) = $75,000.
To calculate the annual tax savings, we need to find the depreciation expense. The depreciable cost of the machine is $190,000, and it will be depreciated over 5 years, giving an annual depreciation expense of $38,000 ($190,000/5). The tax savings from this depreciation expense is $38,000 x 40% = $15,200.
Therefore, the net incremental cash flow for year 1 is:
$75,000 - $15,200 = $59,800. 
So, the best choice is B.

Nickel Industries Is Considering the Purchase of a New Machine