A $59,000 machine with a 8-year class life was purchased 2 years ago. The machine will now be sold for $50,000 and replaced with a new machine costing $80,000, with a 10-year class life. The new machine will not increase sales, but will decrease operating costs by $4,000 per year. Simplified straight line depreciation is employed for both machines, and the marginal corporate tax rate is 34 percent. What is the incremental annual cash flow associated with the project?

To determine the incremental annual cash flow associated with replacing the old machine with the new one, we need to consider several factors, including the depreciation of both machines, the decrease in operating costs, and the impact of taxes. Here is the step-by-step calculation:

### Step 1: Determine Annual Depreciation
#### Old Machine:
- Cost of old machine: \$59,000
- Class life: 8 years
- Annual depreciation: $\frac{\$59,000}{8} = \$7,375$

#### New Machine:
- Cost of new machine: \$80,000
- Class life: 10 years
- Annual depreciation: $\frac{\$80,000}{10} = \$8,000$

### Step 2: Determine the Change in Depreciation
The new machine's annual depreciation is higher, so the change in depreciation expense is:
\[ \Delta \text{Depreciation} = \$8,000 - \$7,375 = \$625 \]

### Step 3: Determine the Tax Savings Due to Depreciation
Tax savings are given by the depreciation change multiplied by the tax rate:
\[ \text{Tax Savings} = \Delta \text{Depreciation} \times \text{Tax Rate} \]
\[ \text{Tax Savings} = \$625 \times 0.34 = \$212.50 \]

### Step 4: Determine the Decrease in Operating Costs
The new machine will decrease operating costs by \$4,000 per year.

### Step 5: Calculate the Total Incremental Annual Cash Flow
The total incremental annual cash flow is the sum of the operating cost savings and the tax savings from the additional depreciation:
\[ \text{Incremental Annual Cash Flow} = \text{Operating Cost Savings} + \text{Tax Savings} \]
\[ \text{Incremental Annual Cash Flow} = \$4,000 + \$212.50 = \$4,212.50 \]

Therefore, the incremental annual cash flow associated with the project is:
\[ \boxed{\$4,212.50} \]

Would you like further details or have any questions? Here are five additional questions you might consider:

1. How do you calculate the Net Present Value (NPV) of this project?
2. What is the impact of salvage value on the project's cash flow?
3. How would a change in the tax rate affect the incremental cash flow?
4. How do you calculate the Internal Rate of Return (IRR) for this project?
5. What other costs should be considered in capital budgeting decisions?

**Tip:** When replacing equipment, always consider both the tax implications and the operational benefits to fully understand the financial impact of the investment.

Learn how to calculate incremental annual cash flow when replacing a $59,000 machine with a $80,000 machine, considering depreciation, tax savings, and operating cost reductions. Detailed step-by-step solution with specific financial data points.

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