ABC Company has received a new order for its products. However, its machines are all working at full capacity. In order to accept the new order, the company needs to buy a new machine. The details relating to the order, the new machine and other costs are shown below:

Variable cost = 20% of sales The project requires an additional net working capital of $40,000, which is sufficient for the duration of the project.

Cost of new machine = $300,000 Life of machine = 3 years Salvage value of machine at end of 3 years = $60,000 Depreciation is straight line to zero over 3 years Cost savings from using new machine per year = $10,000

How do I calculate the depreciation?

The answer for the depreciation for each year is $100,000.

Year 1 2 3 Sales $ 160,000 $180,000 $200,000