The Mountain Jam Company purchased a machine 5 years ago for $70,000. It has an
ID: 2788640 • Letter: T
Question
The Mountain Jam Company purchased a machine 5 years ago for $70,000. It has an estimated life of 7 years from the time of purchase and is expected to have zero salvage value at the end of 7th year. The old machine can be sold today for $60,000. A new machine can be purchased for S69,300. It has a 2- year life and is expected to reduce operating expenses by $50,000 per year. Sales aren't expected to change. After 2 years, the new machine can be sold for $20,000. The company uses the straight-line method to calculate depreciation for both machines. The tax rate is 40%. What is the cash flow from the replacement project for Year 1? 6 9 0 OA. $27,684 OB. $31,544 O C. $34,316 O D. $50,000 OE. $39.860 2Explanation / Answer
Answer:
Option E i.e. $39,860
Depreciation Expense = (Cost – Salvage Value) / Useful Life
Depreciation on New Machine= (69,300 – 20,000) / 2
Depreciation on New Machine= 49,300 / 2
Depreciation on New Machine= $24,650
Operating Cash Flow = Annual Saving * (1 – Tax) + Tax * Depreciation
Operating Cash Flow = 50,000 * (1 – 0.40) + 24,650 * 0.40
Operating Cash Flow = $30,000 + $9,860
Operating Cash Flow = $39,860