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# Operating Cash Flow and Capital Budgeting Analysis

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1. A new machine being considered to replace an old one will decrease the firm's operating costs by \$10,000 annually. The firm's tax rate is 40%. For capital budgeting, what is the annual after tax cash flow associated to this savings?

2. A firm is considering a project with data shown below. What is the project's operating cash flow for year 1?

Sales revenues \$35,000
Depreciation \$10,000
Other operating costs (excl dep) \$17,000
Interest Exp \$4,000
Common stock divs \$2,000
Tax rate 35%

3. A firm is in the final year of a project. The equipment originally cost \$20,000 of which 75% has been depreciated. The equipment can be sold today for \$6,000 and its tax rate is 40%. What is the net equipments after-tax salvage value for use in capital budgeting analysis?

#### Solution Preview

1. Reduction in Operating Cost = \$10,000

Tax Rate = 40%

Expenses on Tax= 40% x 10,000 = \$4,000

After Tax Cash Flow savings = \$6000

think of it this way, if in the past revenue was ...

#### Solution Summary

This solution shows step-by-step calculations to determine the reduction in operating cost, after tax cash flow savings, taxable income, taxable profit and after tax salvage value.

\$2.19