A Firm Is Evaluating a New Machine to Replace an Existing

Multiple Choice

A firm is evaluating a new machine to replace an existing, older machine.The old (existing) machine is being depreciated at $20,000 per year, whereas the new machine's depreciation will be $18,000.The firm's marginal tax rate is 30 percent.Everything else equal, if the new machine is purchased, what effect will the change in depreciation have on the firm's incremental operating cash flows?

A) There should be no effect on the firm's cash flows, because depreciation is a noncash expense.
B) Operating cash flows will increase by $2,000.
C) Operating cash flows will increase by $1,400.
D) Operating cash flows will decrease by $600.
E) None of the above is correct.