Question: Miller Corporation is considering replacing a machine. The replacement will reduce operating expenses (that is, increase revenues) by $36,000 per year for each of the
Miller Corporation is considering replacing a machine.
The replacement will reduce operating expenses (that is, increase revenues) by $36,000 per year for each of the 5 years the new machine is expected to last.
Although the old machine has zero book value, it can be used for 5 more years.
The depreciable value of the new machine is $148,000.
The firm will depreciate the machine under MACRS using a 5-year recovery period (see Table 3.2 for the applicable depreciation percentages) and is subject to a 40% tax rate on ordinary income.
Estimate the incremental operating cash inflows generated by the replacement.
(Note: Be sure to consider the depreciation in year 6.)
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