(Organizing cash flows) Joe Businessperson is considering the purchase of a mach

Question

(Organizing cash flows) Joe Businessperson is considering the purchase of a machine $650,000. The machine would be depreciated to a $50,000 sal vage value over a nine year period using th straight-line method and would bring in incremetal cash income of $80,000 in each year. However, th firm expects to sell the machine for $60,000 at the en of the nine years. The firm's federal tax rate on income is 35%. Calculate the incremental cash flow from: a. The purchase of the machine b. The depreciation of the machine c. The operation of the machine d. The sale of the machine

Explanation / Answer

incremental cash flow from purchase of machine = -650,000

depriciation per year = 650000 -50000/9 = 66,666.67

incremental cash flow from depriciation of machine = 66,666.67

incremental cash flow from operation

= (80000 - 66666.67) * (1-0.35) + 66666.67

= $75333.34

incremental cash flow from sale of machine

= 60000 * (1-0.35)

= 39000

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