Parker Chemicals purchased a hexene extractor 10 years ago for $120,000. It is b
ID: 2770190 • Letter: P
Question
Parker Chemicals purchased a hexene extractor 10 years ago for $120,000. It is being depreciated on a straight-line basis over 15 years to an estimated salvage value of zero. It can be sold today for $10,000. Parker is considering purchasing a new more efficient extractor that would cost $270,000 installed and would be depreciated as a 10-year MACRS asset. (The depreciation rate for year one is 10 percent for this asset.) The company's marginal tax rate is 40%. If the new extractor is purchased, annual revenues will increase by $10,000 and annual operating expenses will decrease by $10,000. What is the net cash flow in year 1? A) $19,600 B) $ 7,600 C) $24,200 D) $600
Explanation / Answer
Dep. (old extractor) = $120,000/15 = $8,000/year
Dep1(new extractor) = $270,000(.10) = $27,000
NCF = ($10,000 - (-$10,000) - $19,000)(1- 0.4) + $19,000= $19,600