(31) Al is purchasing a new rivet machine to replace an existing one. 
The new machine costs $8,000 and will require an additional cost of
$1,000 for modification and training.  It will be depreciated using
simplified straight line depreciation over five years.  The new
machine operates much faster than the old machine and with better
quality.  Consequently, sales are expected to increase by $2,100 per
year for the next five years.  While it is faster, it is fully
automated and will result in increased electricity costs for the firm
by $700 per year.  It will, however, save about $850 per year in labor
costs.  The old machine is 20 years old and has already been fully
depreciated.  If the firm's marginal tax rate is 28%, compute the
after tax incremental cash flows for thenew machine for years 1
through 5.

a) $2,698
b)$450
c)$2,214
d)$1,620

Hi k9queen!!

I will try to solve this problem:

The initial outlay is:
CF0 = $8,000 + $1,000 = $9,000

Annual depreciations using simplified straight line depreciation over
five years:

D = CF0/5 = $9,000/5 = $1,800

For each year (1 to 5) the cash flow will be:

CF = (Sales Increase - Electricity costs increase + Labor costs
decrease - Depreciations)*(1 - Tax rate) + Depreciations

As you can in the first part of the formula the increasing costs are
deduced and the decreasing costs are added.

CF = ($2,100 - $700 + $850 - $1,800)*(1-0.28) + $1,800 = $450 * 0.72 +
$1,800 =
   = $2,124

For each year CF will be the same, according with the data that you
provide,
then the after tax incremental cash flows for the new machine for
years 1
through 5 is:

CF*5 - CF0 = $2,124 * 5 - $9,000 = $10,620 - $9,000 = $1,620

The correct answer is d).

This was made bassed in my own knowledge, if you need a clarification,
please post a request for it.

Best Regards
livioflores-ga

Great answer-very comprehensive!
Fast!!

k9queen -

Thanks for all of your questions.
However, you are not offering enough for the effort required to solve.
Please consider a minimum of $10 per such question.

Thanks,
ragingacademic