Lifesaver for work shown! Thanks! Moon Pie Company is considering automated baki

Question

Lifesaver for work shown! Thanks!

Moon Pie Company is considering automated baking equipment that costs $500,000 installed and would replace the present hand-made production method. The present equipment has a zero book and salvage value. The new equipment will not increase revenues but will reduce operating costs from a current level of $600,000 to $300,000 per year. The depreciation of the new equipment will be $73,000 per year. What are the annual incremental net cash flows? Assume a marginal tax rate of 40 percent.

Explanation / Answer

Incremental cash flows as follws...   $ incremental cash flow 300000 add: depreciation 73000 EBIT 373000 less:TAX 40% 149200  =Net incremental cash flow 223800   $ incremental cash flow 300000 add: depreciation 73000 EBIT 373000 less:TAX 40% 149200  =Net incremental cash flow 223800

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