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The Moore Corporation is considering the acquisition of a new machine. The machine can be purchased for $90,000; twill cost $6,000 to transport to Moore's plant and $9,000 to install. It is seated that the machine will last 10 years. and it Es expected to have an estimated salvage value of $5,000. Over its 10-year life, the machine is expected to produce 2,000 units per year with a selling price of $500 and combined material and labor costs of $450 per unit. Federal tax regulations permit machines of this type to be depreciated using the straight-line method over 5 years with no estimated salvage value. Moore ha a marginal tax rate of 40%. What is the net cash flow for the third year that Moore Corporation should use in a capital budgeting analysis?
The company will receive net cash inflows of $50 per unit ($500 selling price --- $450 of variable costs), or a total of $100,000 per year. This amount will be subject to taxation, but, for the first 5 years. there will be a ''depreciation deduction of $21,000 per year ($105,000 cost divided by 5 years). Therefore, deducting the $21,000 of depreciation expense from the $ 100.000 of contribution margin will result in taxable income of $79,000. After income taxes of $31,600 ($79,000 x 40%), the net cash flow in the third year is $68,400 ($100,000 - $31,600).