ABC welding machine has 6 years of remaining life. If kept, the machine will have depreciation expenses of $700 each year. If the current book value is $4,200, and it can be sold for $3,500 at this time. If the old machine is not replaced, it can be sold for $800 at the end of its useful life. ABC is considering purchasing a new machine, which costs $12,000 and has an estimated useful life of 6 years with an estimated salvage value of $2,000. This machine will be depreciated straight-line to zero book value. The new machine would raise sales by $3,000 per year; the new machine would increase operating costs by $500 per year. To support the greater sales, the new machine would require $5,000 additional investment in NWC. ABC's tax rate is 25% and its WACC is 15%. What is the amount of operating cash flow in year 2 (initial cash flow)?
a. $2.250
b. $2,300
c. $2,100
d. $2,200
e. $2,150

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andromache andromache · Answer 1 · 2021-08-10T11:10:45+02:00

The amount of the operating cash flow in year 2 is $2,200

The calculation of the amount of the operating cash flow in year 2 is as follows:

But before that following calculations need to be done:

Depreciation on the new machine is

= New machine cost ÷ Useful life

= $12,000 ÷ 6

= $2,000

Now,

Incremental depreciation because of a replacement should be

=Depreciation on the new machine - Depreciation on the old machine

= $2,000 - $700

= $1,300

Now

Tax shield on depreciation is

= 25% of $1,300

= $325

Finally, the Operating cash flow in year 2 is

= (Increase in sales- Increase in operating cost) × (1 - tax rate) + Tax shield on depreciation

= ($3,000 - $500) × 0.75 + $325

= $2,200

Therefore we can conclude that the amount of the operating cash flow in year 2 is $2,200.

Hence, option d is correct.

Learn more about the operating cash flow here: brainly.com/question/17001006