A new machine costs 20000 will provide 5000 savings each yea

A new machine costs $20,000 will provide $5,000 savings each year for 5 years. The machine will be depreciated on a straight line basis over 5 years, and it will not have any value at the end of 5 years. If the tax rate is 27%, what is the amount of operating cash flow (OCF) each year? Answer to the nearest dollar, for example 102.

Solution

Cost savings $          5,000 Less: Depreciation $          4,000 =20000/5 Profit before tax $          1,000 Less: Tax @ 27% $              270 Net income $              730 Add: Depreciation $          4,000 Operating cash flows $          4,730