Super Sew 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 $3000 to install it.The embroiderer will save $12,000 in labor expense each year.Super Sew 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

Annual operating cash flow can be calculated using the following formula:

Annual operating cash flow = Additional sales revenue - Operating expenses - Taxes - Depreciation

Plugging in the given values:

Additional sales revenue = $400,000 
Operating expenses = $136,000 
Depreciation = ($295,000 + $3,000) / 5 = $59,600 
Tax rate = 34%

Annual operating cash flow = $400,000 - $136,000 - ($400,000 - $59,600 - $12,000 - $3,000) * 34% - $59,600

Annual operating cash flow = $202,424

Therefore, the correct answer is C. This machine will generate an annual operating cash flow of $202,424 for Super Sew.

Super Sew Is Considering the Purchase of a New Embroidering