AFB Corp. needs to replace an old lathe with a new, more efficient model. The ol

Question

AFB Corp. needs to replace an old lathe with a new, more efficient model. The old lathe was purchased for S50,000 nine years ago and has a current book value of S5,000. (The old machine is being depreciated on a straight - line basis over a ten - year useful life.) The new lathe costs $100,000. It will cost the company S 10,000 to get the new lathe to the factory and get it installed. The old machine will be sold as scrap metal for $2,000. The new machine is also being depreciated on a straight -- line basis over ten years. Sales are expected to increase by $8,000 per year while operating expenses are expected to decrease by $12,000 per year. AFB?s marginal tax rate is 40%. Additional working capital of $3,000 is required to maintain the new machine and higher sales level. The new lathe is expected to be sold for S5,000 at the end of the projects ten-- year life. What is the incremental free cash flow during years 2 through 10 of the project? A. $13,600 B. $15,800 C. $16,400 D. $14,400

Explanation / Answer

Annual Depreciation = (100000+10000)/10 = 11000

Incremental Free Cash Flow = (8000+12000)*(1-40%) + 11000*40%

Incremental Free Cash Flow = $ 16400

Answer

C) $ 16400

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