Asked by Crissy Hogue on May 17, 2024
Verified
A drill press costs $30,000 and is expected to have a 10-year life. The drill press will be depreciated on a straight-line basis over 10 years to a zero estimated salvage value. This machine is expected to reduce the firm's cash operating costs by $4,500 per year. If the firm is in the 40 percent marginal tax bracket, determine the annual net cash flows generated by the drill press.
A) $4,500
B) $900
C) $5,700
D) $3,900
Cash Operating Costs
Expenditures directly related to the day-to-day business operations, excluding non-cash costs.
Depreciated
Refers to a reduction in the value of an asset over time, typically due to wear and tear or obsolescence.
Marginal Tax Rate
The tax rate that applies to the last dollar of the taxpayer's income or the next dollar of taxable income earned.
- Diagnose and assess critical and negligible cash flows during capital budgeting activities.
- Evaluate the total capital needed for a project, with attention to tax impacts.
Verified Answer
AS
Artorn SriruyaMay 18, 2024
Final Answer :
D
Explanation :
The annual depreciation expense is $30,000 / 10 = $3,000. The annual savings before taxes is $4,500. The tax savings due to depreciation is $3,000 * 40% = $1,200. Therefore, the annual net cash flow is $4,500 (savings) + $1,200 (tax savings) = $5,700. However, we must subtract the taxes on the savings, which is $4,500 * 40% = $1,800. So, the net cash flow is $5,700 - $1,800 = $3,900.
Learning Objectives
- Diagnose and assess critical and negligible cash flows during capital budgeting activities.
- Evaluate the total capital needed for a project, with attention to tax impacts.
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