A $64,000 machine with a 6-year class life was purchased 2 years ago. The machine will now be sold for $50,000 and replaced with a new machine costing $82,000, with a 10-year class life. The new machine will not increase sales, but will decrease operating costs by $9,000 per year. Simplified straight line depreciation is employed for both machines, and the marginal corporate tax rate is 34 percent. What is the incremental annual cash flow associated with the project

$6,779

Explanation:

Calculation to determine the incremental annual cash flow associated with the project

First step is to calculate the depreciation

Depreciation=[($64,000/6 years)-($82,000/10 years)

Depreciation=$10,667-$8,200

Depreciation=$2,467

Now let calculate the Incremental annual cash flow

Incremental annual cash flow ={($9,000-$2,467)

-[($9,000-$2,467)*34%]+$2,467}

Incremental annual cash flow =[($6,533-$2,221)+$2,467]

Incremental annual cash flow =$4,312+$2,467

Incremental annual cash flow=$6,779

Therefore the incremental annual cash flow associated with the project is $6,779