Question

Carter company’s machine costs $20,000 and is expected to have a 10-year life. It will depreciate straight-line over a 10-year life to a zero salvage value and it is expected to reduce the firm’s cash operating costs by $3,000 per year. If the firm is in the 50 percent marginal tax bracket, what estimated Year 1–n net cash flows will the machine generate?

Answer #1

MACHINE COST | 20000 | ||

YEAR | 10 | ||

SALVAGE | 0 | ||

DEPRECAITION = | MACHINE COST /YEAR | ||

DEPRECAITION = | 20000/10 | ||

DEPRECAITION = | 2000 | ||

CASH FLOW GENERATED BY MACHINE YEAR 1-n | |||

PARTICULARS | AMOUNT | ||

COST SAVING | 3000 | ||

LESS DEPN | -2000 | ||

NET INCOME | 1000 | ||

LESS TAX @ 50% | -500 | ||

INCOME AFTER TAX | 500 | ||

ADD : DEPN | 2000 | ||

CASH FLOW | 2500 | ||

Machine wil Generate $ 2500 Cash Flow Per Year | |||

total cash flow in 10 year = | 2500*10 | ||

total cash flow in 10 year = | 25000 |

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