Question

3. Your firm is considering buying a new machine that costs $200,000, is expected to generate $110,000 in new revenue each year and will cost $45,000 a year to operate. If your firm's marginal income tax rate is 35% what is the Net Cash Flow your firm will realize from the new machine during the first year? Assume the MACRS depreciation rate for the machine for year 1 is 20%. Note - do not include the cost of the machine in your answer.

Answer 1

The net operating cash flow generated year 1 is $ 85,500.

computed as follows:
Incremental income $ 110,000
Less Depreciation 40,000 ( 20% of 200,000)
Net Income after depreciation $ 70,000
Income Tax 35% $ 24,500 ( 35% of 70,000)
Net Income after Tax 45,500
Add : depreciation 40,000
Cash Flow Generated Year 1 85,500

Answer 2

yes