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

Question

My Corp. needs to replace an old lathe with a new, more efficient model. The old lathe was purchased for $50,000 nine years ago and has a current book value of $5,000. (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 $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. My 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 $5,000 at the end of the project's ten-year life. What is the incremental free cash flow during years 2 through 10 of the project?

A. $13,600

B. $14,400

C. $15,800

D. $16,400

Explanation / Answer

Revenues + decrease in operating expenses - depreciation - tax(1-.40) + dep.=Incremental Cash Flow Incremental Cash Flow = $8000 + $12000 - $11000 =$9000 - $3600 = $5400 + $11000 = $14,400 Depreciation = (100000+10000) /10 = 110000/10 =$11000 B. $14,400

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.