Can someone please answer as detailed as possible the steps to solve this? A $63

Question

Can someone please answer as detailed as possible the steps to solve this?

A $63,000 machine with a 7-year class life was purchased 2 years ago. The machine will now be sold for $50,000 and replaced with a new machine costing $75,000, with a 5-year class life. The new machine will not increase sales, but will decrease operating costs by $16,000 per year. Simplified straight line depreciation is employed for both machines, and the marginal corporate tax rate is 34 percent. What is the incremental annual cash flow associated with the project? O 15,320 12,260 10,560 O 12,600 7,260

Explanation / Answer

D.$12,600.

the following table shows it:

note:

increase in depreciation expenditure:

Decrease in expenditure (which is a form of increase in income) $16,000 less: incerease in depreciation expenditure( see note) ($6,000) increase in earnings before tax $10,000 less: tax @34% ($3,400) Increase earnings after tax $6,600 Addback : increase in depreciation $6,000 incremental annual cash flow $12,600

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