te the answer choice that best completes the statement or answers the question.

Question

te the answer choice that best completes the statement or answers the question. 1. Stanton Inc. is considering the purchase of a new machine, which will reduce manufacturing costs by $5,000 annually and increase earnings before depreciation and taxes by $6,000 annually. Stanton will use the MACRS method to depreciate the machine, and it has estimated the depreciation expense for the first year as $8,000. Which of the following is the supplemental operating cash flow for the first year if Stanton's marginal tax rate is 40 percent? a. $15,000 b. $23,000 c. $40,000 d. $9,800 e. $4,500

Explanation / Answer

Solution :

Operating Cash Flow for the first year = [(Increase in Earnings + Saving in costs - Depreciation) * (1-Tax Rate)] + Depreciation

= [($6000 + $5000 - $8000)*(1-0.40)] + $8000

= ($3000*0.60) + $8000

= $1800 + $8000

= $9800

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