ABC will purchase a machine that will cost $2,575,000. Required modifications will cost $375,000. ABC will need to invest $75,000 for additional inventory. The machine has an IRS approved useful life of 7 years; it is presumed to have no salvage value. ABC plans to depreciate the machine by using the straight-line method. The machine is expected to increase ABC's sales revenues by $1,890,000 per year; operating costs excluding depreciation are estimated at $454,600 per year. Assume that the firm's tax rate is 40%. What is the annual operating cash flow?
1. $413,440
2. $1,626,440
3. $922,400
4. $1,029,811
Answer is $1,029,811:
Initial Investment = Cost of Machine + Modification Cost
Initial Investment = $2,575,000 + $375,000
Initial Investment = $2,950,000
Salvage Value = $0
Useful Life = 7 years
Depreciation per year = (Initial Investment - Salvage Value) /
Useful Life
Depreciation per year = ($2,950,000 - $0) / 7
Depreciation per year = $421,428.57
Annual Operating Cash Flow = (Sales – Operating Costs) * (1 –
Tax Rate) + Tax Rate * Depreciation
Annual Operating Cash Flow = ($1,890,000 - $454,600) * (1 - 0.40) +
0.40 * $421,428.571
Annual Operating Cash Flow = $1,435,400 * 0.60 + 0.40 *
$421,428.571
Annual Operating Cash Flow = $1,029,811
Get Answers For Free
Most questions answered within 1 hours.