The management of Casper Company is planning to purchase a new milling machine t
ID: 2739169 • Letter: T
Question
The management of Casper Company is planning to purchase a new milling machine that will cost $150,000 installed. The old milling machine has been fully depreciated but can be sold for $15,000. The new machine will be depreciated on a straight line basis over it's 10 year economic life to an estimated salvage value of $0. If this milling machine will save Casper $25,000 a year in production expenses, what are the annual net cash flows associated with the purchase of this machine? Assume a marginal tax rate of 40 percent.
Explanation / Answer
Depreciation = (Cost - Salvage Value) / Useful life
= (150000 - 0) / 10
= $15000
Savings per year = $25000
Tax Rate = 40%
Net Income = (Savings - Depreciation) (1-tax rate)
= (25000 - 15000) (1-0.40)
= 10000 * 0.60
= $6000
Net Cash Flows = Net Income + Depreciation
= $6000 + $15000
= $21000
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