The management of cooper Equipment is planning to purchase a new milling machine that will cost 160,000 installed.The old machine has been fully depreciated but can be sold for 15,000. The new machine will be depreciated on a straight-line basis over its 10 year economic life to an estimated salvage value of 10,000. If this milling machine will save Cooper 20,000 a year in production expenses, what are the annual net cash flows associated with the purchase of this machine? Assume a marginal tax rate of 40 percent.
Describe the financial statement forecasting process.
Many corporate acquisitions result in losses to the acquiring firms' stockholders. Accordingly, why do firms purchase other corporations? Are they simply paying too much for the acquired corporation? A co-worker asks your opinion. Specifically state the reasons for your argument.
• Explain the importance of the marginal cost of capital (MCC) schedule in financial decision making.
• Describe the financial statement forecasting process.
To calculate the annual net cash flows associated with the purchase of the milling machine, we need to consider the various factors involved. Let's break it down step by step:
1. Cost of the new machine: The cost of the new milling machine is $160,000.
2. Sale of the old machine: The old machine can be sold for $15,000.
3. Depreciation of the new machine: The new machine will be depreciated on a straight-line basis over its 10-year economic life to an estimated salvage value of $10,000. To calculate the annual depreciation expense:
Annual Depreciation Expense = (Cost of the new machine - Salvage value) / Useful life
= ($160,000 - $10,000) / 10
= $15,000
4. Tax savings from depreciation: The depreciation expense can be used to reduce taxable income, resulting in tax savings. To calculate the tax savings:
Tax Savings = Annual Depreciation Expense * Marginal Tax Rate
= $15,000 * 0.4
= $6,000
5. Annual savings in production expenses: The milling machine is expected to save $20,000 per year in production expenses.
Now, to calculate the annual net cash flows:
Annual Net Cash Flow = Savings in production expenses - Tax savings from depreciation
= $20,000 - $6,000
= $14,000
Therefore, the annual net cash flow associated with the purchase of this milling machine is $14,000.