A new machine costs 20000 will provide 11000 savings each ye

A new machine costs $20,000 will provide $11,000 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 28%, what is the amount of operating cash flow (OCF) each year? Answer to the nearest dollar, for example 102.

Solution

Annual depreciation=(Cost-Salvage value)/USeful life

=(20000/5)=$4000/year

Hence OCF=Savings*(1-tax rate)+Tax savings on Depreciation

=11000(1-0.28)+(0.28*$4000)

which is equal to

=$9040.