1.
Determine the cash flow after-tax at the time of purchase of new machine.
1.
Explanation of Solution
Compute the cash flow after-tax at the time of purchase of new machine:
Particulars | Amount | Amount |
Incremental net | $10,000 | |
Net purchase price of new machine | $190,000 | |
Total cost (A) | $200,000 | |
Current disposal | $68,000 | |
Tax shield from deductibility of loss | $13,300 | |
After-tax | $81,300 | |
Net cash flow after-tax (A-B) | $118,700 |
Working notes
Determine the amount of tax from deduction of loss:
Determine the estimated loss on disposal of machine:
2.
Determine the after-tax cash inflow for each year.
2.
Explanation of Solution
Compute the after-tax cash inflow for each year:
Working notes:
Determine the difference in annual after tax variable cost:
Determine the difference in annual after tax fixed cost:
3.
Determine the relevant cash flow at the end of the project.
3.
Explanation of Solution
Compute the relevant cash flow at the end of the project:
Working notes:
Determine the after tax cash flow from disposal of machines:
Particulars | Old Machine | New Machine |
Original cost | $150,000 | $190,000 |
Total | $130,000 | $165,000 |
Book value of machines | $20,000 | $25,000 |
Terminal value of machines | $12,000 | $22,000 |
Gain (Loss) on disposal of machines | -$8,000 | $3,000 |
Tax savings on loss (@ 40%) | $3,200 | $1,200 |
Terminal value of machines on Dec. 31, 2023 | $12,000 | $22,000 |
After-tax cash flow from disposal of machines | $15,200 | $23,200 |
4.
Identify and indicate the relevant cost and revenue data related with asset-replacement decision:
4.
Explanation of Solution
The original cost ($150,000) of the old machine and the accumulated depreciation are considered as sunk cost. Thus, both the information are required to determine the NBV of the old machine. The NBV affects the estimated amount of gain and loss from the disposal of the machine and cash flow after tax.
5.
Determine the undiscounted net cash flow for new machine.
5.
Explanation of Solution
Particulars | Amount |
Net cash flow after-tax | -$118,700 |
Cumulative cash flow after-tax | $126,500 |
After-tax cash flow end of the project | $18,000 |
Undiscounted net cash flow | $25,800 |
Working notes
Determine the cumulative cash flow tax:
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