Delta Inc. is considering the purchase of a new machine which is expected to inc

Question

Delta Inc. is considering the purchase of a new machine which is

expected to increase sales by $10,000 in addition to increasing

non-depreciation expenses by $3,000 annually. Due to the sales

increase, Delta expects its working capital to increase $1,000

during the life of the project. Delta will depreciate the machine

using the straight-line method over the project's five year life to

a salvage value of zero. The machine's purchase price is $20,000.

The firm has a marginal tax rate of 34 percent, and its required

rate of return is 12 percent. The firms after-tax incremental cash flow is year five is

a) $6,980

b) $5,980

c) $7,120

d) $8,620

Explanation / Answer

c) $7,120

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