3. Wooldridge furniture is replacing its old machine with a more efficient one.

Question

3. Wooldridge furniture is replacing its old machine with a more efficient one. The old machine is being depreciated on a straight-line basis at a rate of $10,000 per year. The old machine has a current book value of $100 10-year remaining useful and depreciation life. The new machine, which costs $910,000, will be depreciated for 10 years using simplified straight-line depreciation to zero. Introducing the more efficient machine is expected to increase revenues by $50,000 per year and reduce annual operating costs by $80,000. Compute the year 2 cash flow for this project. Assume wooldridge has a marginal tax rate of 40%. A) $110,400 000 anda B) $49,520 C) $34,520 D) $122,250

Explanation / Answer

Sales $   50,000 Less: Costs $ (80,000) Depreciation $   81,000 910000/10-10000 EBIT $   49,000 Less: Tax payable @ 40% $   19,600 Net income $   29,400 Add: Depreciation $   81,000 Operating cash flow $ 110,400

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