Moon Pie Company is considering automated baking equipment that costs $500,000 installed and would replace the present hand-made production method. The present equipment has a zero book and salvage value. The new equipment will not increase revenues but will reduce operating costs from a current level of $600,000 to $300,000 per year. The depreciation of the new equipment will be $73,000 per year. What are the annual incremental net cash flows? Assume a marginal tax rate of 40 percent.

A) $296,800
B) $136,200
C) $192,200
D) $209,200

Question

Ibrahim Rehmani · Accepted Answer

Final Answer : D, Explanation :  The annual incremental net cash flows can be calculated as follows:1. Savings in operating costs: $600,000 - $300,000 = $300,0002. Depreciation expense: $73,0003. Tax savings due to depreciation: $73,000 * 40% = $29,2004. Net savings before taxes: $300,0005. Tax on savings: $300,000 * 40% = $120,0006. Net savings after taxes: $300,000 - $120,000 = $180,0007. Add back tax savings due to depreciation: $180,000 + $29,200 = $209,200Therefore, the annual incremental net cash flows are $209,200.

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