Homework Answers
Solution :-
As there is no tax rate given in question so there is no effect of depreciation on annual cash flows.
Now let's take view on Machine B
The Annual saving is same in all years
So annual saving in year 4 = $12,500
And as annual maintenance increase every year so
Annual maintenance = $2,500 + ($750*3) = $4750
Therefore net cash flow from machine B =
= $12500 - $4750 = $7,750
Now in case of machine C as life is 3 years means we take new machine at the end of 3 years for next 3 years.
So at the end of year 4 we have cash flow from annual saving and annual maintenance
Annual Saving = $12,750
Annual maintenance = $1,750
Net Cash flow from Machine C in year 4 =
= $12,750 - $1,750 = $11,000
Therefore net incremental Cash flow =
= $7,750 - $11,000 = -$3,250
Therefore the correct answer is (A)
If there is any doubt please ask in comments. Thank you please rate.
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