Craigs Manufacturing Company is considering the purchase of a new machine for a
ID: 2625238 • Letter: C
Question
Craigs Manufacturing Company is considering the purchase of a new machine for a cost of $250,000. The new machine will have a 5-year useful life and will be depreciated to an expected salvage value of zero using the straight-line method. The machine will allow the firm to produce a new product, which is expected to increase the firms income before depreciation, interest, and taxes by $100,000 per year (in each of the five years). Craigs income tax rate is 34%. What is the projected incremental operating cash flow of the machine in each of years 1 to 5?
Explanation / Answer
depriciation per year = 250000/5 = 50000
incremental cash flow in each of 1-5 years = income * (1- taxrate) + depriciation * taxrate
= 100000 * (1-0.34) + 50000 * 0.34
= 83000