a) Explanation Here, the new total installed cost of the new asset is given to be $110,000 including the $5,000 installation cost and $105,000 price of the new grinder. The asset is depreciable under the MARCS 5 year period. The sale of the existing grinder provides $70,000. The accounts receivable would increase by $40,000, inventories by $30,000 and the accounts payable by $58,000. At the end of the 5 years, the existing grinder would have 0 market value and the new one would be sold at a price of $29,000. The firm is also subject to a 40 percent tax bracket. The MACRS provides the depreciation percentages by recovery year of various years. The table below depicts the depreciation percentages of the assets by recovery period on the basis of the first four property classes as follows: Recovery year Percentage by recovery year 3 Years 5 Years 7 Years 10 Years 1 33% 20% 14% 10% 2 45 32 25 18 3 15 19 18 14 4 7 12 12 12 5 12 9 9 6 5 9 8 7 9 7 8 4 6 9 6 10 6 11 4 Totals 100% 100% 100% 100% On the basis of the above depreciation percentages given by the MACRS method, the Grinder's depreciating value for each year can be calculated by multiplying the depreciable value with the percentage per year as follows: Year Percentage Depreciation of new machine 1 20% 110 , 000 × 0.20 = 22 , 000 2 32 110 , 000 × 0.32 = 35 , 200 3 19 110 , 000 × 0.19 = 20 , 900 4 12 110 , 000 × 0.12 = 13 , 200 5 12 110 , 000 × 0.12 = 13 , 200 6 5 110 , 000 × 0.05 = 5 , 500 The proceeds from the sale of old asset is $70,000 and the installed cost of the old machine was $60,000 before 2 years. This means that the old machine have completed 2 years of life out of its 5 year depreciation period life. At the period of 2 years, the machine will depreciate by 0.52 percent which means the accumulated depreciation value can be calculated by multiplying the installed value with the depreciation percent as follows: Accumulated Depreciation value 2 years = Installed value × Depreciation percent = 60 , 000 × 0.52 = 31 , 200 The accumulated depreciation value is $31,200. Thus, the book value of the asset at the third year can be calculated by subtracting the recaptured depreciation from the installed cost as follows: Book value 3 years = Installed cost − Depreciation 3 years = 60 , 000 − 31 , 200 = 28 , 800 Thus, t he gain on sale of the old asset can be calculated by subtracting the book value from the sale price as follows: Gain on the sale of old asset = sale price − Book value = 70 , 000 − 28 , 800 = 41 , 200 Thus, the gain from the sale of the old asset is $41,200 b) Summary Introduction To determine: The operating cash flows associated with the proposed replacement decision. c) Summary Introduction To determine: The Terminal cash flow of the replacement decision. d) Summary Introduction To determine: The cash flow chart of the replacement decision.

Principles of Managerial Finance Custom Edition for Wilmington University, 4/e

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ISBN: 9781323419571

Author: Gitman

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Question

Definition Definition Tax imposed by the government on the "gain" or increase in the value of an asset at the time of its sale by the owner. Capital gain is computed based on the purchase price and sale price of the asset. If the sale price of the asset is more than the purchase price, there is a gain on the sale of asset. A tax is imposed on such gain in accordance with the applicable tax rates at the time of sale.

Chapter 11, Problem 11.25P

Summary Introduction

To determine:

Initial investment associated with the proposed replacement plan.

Introduction:

The capital budgeting is the process of making huge investments by the firms to make their capital assets grow faster such as the building of new buildings, purchase of advanced costly machineries etc.

The incremental cash flow is the additional cash flow for the firm that is generated out of the new capital investment that the firm has undertaken.

Summary Introduction

To determine:

The operating cash flows associated with the proposed replacement decision.

Summary Introduction

To determine:

The Terminal cash flow of the replacement decision.

Summary Introduction

To determine:

The cash flow chart of the replacement decision.

Expert Solution & Answer

Chapter 11 Solutions

Principles of Managerial Finance Custom Edition for Wilmington University, 4/e

Ch. 11.1 - Prob. 1FOE Ch. 11.1 - Prob. 11.1RQ Ch. 11.1 - What three types of net cash flows may exist for a...Ch. 11.1 - Prob. 11.3RQ Ch. 11.1 - Prob. 11.4RQ Ch. 11.1 - Prob. 1GF Ch. 11.2 - Explain how to use each of the following inputs to...Ch. 11.2 - Prob. 11.6RQ Ch. 11.2 - Prob. 11.7RQ Ch. 11.2 - Prob. 11.8RQ

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