Outback is purchasing a new machine that will cost $98,000. The machine will qualify as MACRS...

Question:

Outback is purchasing a new machine that will cost $98,000. The machine will qualify as MACRS 5-year property but has an economic life of 8 years.

(5-Year MACRS Depreciation Schedule: 20%, 32%, 19%, 12%, 11%, 6%)

The new machine is expected to increase revenues by $35,000 per year and operating costs are expected to increase by $15,000 per year.

If the firm's marginal tax rate is 34% and the first year's depreciation rate is 20%, what is the year 1 operating cash flow?

A) $264

B) $19,864

C) $7,984

D) $26,034

Operating Cash flow:

Operating cash flow of an asset is given as the net operating income after tax after adjusting for the non cash items. It is the cash generated from the earnings of the company of a given period.

Answer and Explanation:

The correct choice is Option B.

Operating cash flow of Year 1 is calculated as:

Incremental revenue = $35,000.00

Less: Incremental costs = $15,000.00

Less: Depreciation = 98,000 x 20% = $19,600.00

Operating profit before tax = $400.00

Less: Tax @ 34% = $136.00

Operating profit after tax = $264.00

Add: Depreciation = $19,600.00

Operating cash flow = $19,864.00


Learn more about this topic:

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Operating Cash Flow: Definition & Examples

from Finance 101: Principles of Finance

Chapter 10 / Lesson 4
10K

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