Regal Enterprises is considering the purchase of a new embroidering machine. It is expected to generate additional sales of $400,000 per year. The machine will cost $295,000, plus $3,000 to install it. The embroiderer will save $12,000 in labor expense each year. Regal is in the 34% income tax bracket. The machine will be depreciated on a straight-line basis over five years (it has no salvage value). The embroiderer will require annual operating expenses of $136,000. What is the annual operating cash flow that the machine will generate?
A) $316,954
B) $124,000
C) $202,424
D) $165,816

Question

Quizplus · Accepted Answer

1. Calculation of annual depreciation expense:
Cost of the machine + installation = $295,000 + $3,000 = $298,000
Depreciation expense = $298,000 / 5 = $59,600

2. Calculation of annual tax savings:
Tax savings = Depreciation expense x Tax rate
Tax savings = $59,600 x 0.34 = $20,264

3. Calculation of annual operating cash flow:
Additional sales revenue = $400,000
Less: Cost of goods sold = ($136,000 + $12,000) = $148,000
Less: Depreciation expense = $59,600
Less: Income tax expense = $20,264
Net operating cash flow = $172,136

Therefore, the annual operating cash flow that the machine will generate is $202,424 ($172,136 + $30,288-tax savings).

Regal Enterprises Is Considering the Purchase of a New Embroidering