The Mountain Jam Company purchased a machine 5 years ago for $70,000.

The Mountain Jam Company purchased a machine 5 years ago for $70,000. It has an estimated life of 7 years from the time of purchase and is expected to have zero salvage value at the end of 7th year. The old machine can be sold today for $60,000.

A new machine can be purchased for $69,300. It has a 2-year life and is expected to reduce operating expenses by $50,000 per year. Sales aren’t expected to change. After 2 years, the new machine can be sold for $20,000. The company uses the straight-line method to calculate depreciation for both machines. The tax rate is 40%. What is the cash flow from the replacement project for Year 1?
A) $27,684
B) $34,316
C) $39,860
D) $50,000
E) $31,544

ANSWER

C