Question

Dexter Smith & Co. is replacing a machine simply because it has worn out. The new machine will not affect either sale or operating cost and will not have any salvage value at the end of its five year life. The firm has a 34 percent tax rate, uses straight line depreciation over an asset life, and has a positive net income. Given this, which one of the following statements is correct?
As a project, the new machine has a net present value equal to minus one times the machines purchase price.

The new machine will have a zero rate of return.

The new machine will generate positive operating cash flow.

The new machine will create a cash outflow when the firm disposes of it at the end of its life.

The new machine creates erosion effects.

Answer 1

Answer:

The new machine will generate positive operating cash flow.

Explanation:

Because it will result in benefit due to depreciation tax savings. As a project, the new machine has a net present value equal to minus one times the machines purchase price.