Determining a cash flow annuity with income tax considerations Jay Welch is considering whether to invest in

Question:

Determining a cash flow annuity with income tax considerations Jay Welch is considering whether to invest in a computer game machine that he would place in a hotel his brother owns. The machine would cost $14,000 and has an expected useful life of three years and a salvage value of $2,000. Mr. Welch estimates the machine would generate revenue of $7,000 per year and cost $1,200 per year to operate. He uses the straight-line method for depreciation. His income tax rate is 30 percent.

Required

What amount of net cash inflow from operations would Mr. Welch expect for the first year if he invests in the machine?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Annuity
An annuity is a series of equal payment made at equal intervals during a period of time. In other words annuity is a contract between insurer and insurance company in which insurer make a lump-sum payment or a series of payment and, in return,...