A company is considering the purchase of a new machine for $48,000. Management predicts that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $12,000 per year including depreciation of $3,000 per year. The company's tax rate is 40%.
- What is the annual cash flow for the new machine?
A) $4,000.
B) $2,400.
C) $7,000.
D) $5,400.
E) $1,600.

Question

Quizplus · Accepted Answer

Annual revenue from the machine = $16,000
Expenses (including depreciation) = $12,000
Profit before taxes = $4,000
Tax rate = 40%
Profit after taxes = 60% of $4,000 = $2,400
Annual cash flow = Profit after taxes + Depreciation
= $2,400 + $3,000
= $5,400
Therefore, the annual cash flow for the new machine is $5,400. Option D is the correct answer.

A Company Is Considering the Purchase of a New Machine