Leumax Inc. is contemplating the purchase of a new caterpillar machine. The mach

Question

Leumax Inc. is contemplating the purchase of a new caterpillar machine. The machine will cost $180,000. Its market value at the end of five years is estimated as $40,000. The accounting department uses the straight line method to depreciate the equipment. The justification for this machine includes $40,000 savings per year in labor and $30,000 savings per year in reduced material. The before-tax MARR is 40%. Use this information to solve problems 8 and 9. The taxable income for year three is most nearly: $42,000 $5,010 $16,000 $28,000 $38,000 The total before-tax cash flow in year five is most nearly: $9,0000 $40,000 $70,000 $80,000 $110,000

Explanation / Answer

Solution:

8 Taxable Income for year three Savings in labor                40,000 Savings in material                30,000 Less: Depreciation expense - ( 180,000 - $ 40,000) / 5 years                28,000 Taxable income                42,000 The answer to the above question is a. $ 42,000 9 Total before tax cash flow for year five = Savings in labor 40,000 Savings in material 30,000 Add: Sale of machine 40,000 Total before tax cash flow for year five = 110,000 The answer to the above question is e. $ 110,000

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