Use the following information to answer the question(s) below Hose plc is examin

Question

Use the following information to answer the question(s) below Hose plc is examining the possibility of purchasing a machine for a new venture. The machine will cost E50,000, have a four -year life and a scrap value of £10,000. An additional investment of £15,000 in working capital will be needed at the outset. This is recoverable at the end of the project. The accountant's figures for the annual trading accounts are as follows: Labour Direct overhead 20,000 d overhead Depreciation Annual profit Allocated overhead consists of central administrative costs which are incurred with or without this project. The machine will be eligible for a 25% writing-down 30% For a project of this or risk. allowance on the reducing balance. Tax is payable at risk class a minimum return of 14% is considered acceptable. Assume no inflation 32) The incremental cash flow in Year 1 if they elect tio purchase the machine is closest to: A) 740,000 B) 110,000 C) 25,000 D) 38,750

Explanation / Answer

Q32 Answer is D. $ 38,750 Explanation; Revenue: 100,000 Less: Variable cost (20,000+10,000+20,000) 50,000 Net income before tax 50000 Less: Depreciation 12500 (50000*25%) Net income before tax 37500 Less: tax @30% 11250 net income after tax 26250 Add: Depreciation 12500 Cash flows of Year-1 38750 Q33. Answer is C. $ 37,109 Explanation: Revenue: 100,000 Less: Variable cost (20,000+10,000+20,000) 50,000 Net income before tax 50000 Less: Depreciation 7031.25 (37500-25%)*25% Net income before tax 42968.75 Less: tax @30% 12890.625 net income after tax 30078.125 Add: Depreciation 7031.25 Cash flows of Year-1 37109.375

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