16. ( 20 pts total) A large, profitable corporation wih net income exceed $20 mi

Question

16. ( 20 pts total) A large, profitable corporation wih net income exceed $20 million is considering the purchase of a new special tools for the manufacture of finished plastic products. This tool costs $100,000 with the expected salvae value of O after 4 years of useful life. The company expects the net income of $38,000 per year plans to dispose it at the end of year 4. The company elects MACRS depreciation method to accelerate tax w a) Determine the after cash flow for this investment by completing the table below (15 pts) Taxable Income Tax Cash Flovw 35% | (A Before-Tax MACRS YR Cash Flow Depreciation Income (ATCF) (BTCF) (Dt) (TI) (5 pts) According to the tax rules regarding the disposal of a depreciated asset, if the market value is higher than the book value at the time of disposal, then the excess depreciation will be recaptured as taxable income and taxed as ordinary gain. On the other hand if the book value is higher than the market value, there is a loss on disposal and it is deducted from the taxable income. If the tool is sold for $20,000 in year 4, determine the cash flow after tax for year 4 (a)

Explanation / Answer

Compuation of after tax cash flow -

Compuation of the same in desired format

2. computation of after tax cashflow after considering salvage value of 20000 at the year end 4 -

Please note all values are in $.

In case of any clarification required please comment.

Depriciation rate of 3 year 33.33% 44.45% 14.81% 7.41% Year 0 1 2 3 4 Initial investment -100000 Net income 38000 38000 38000 38000 less Depriciation 33330 44450 14810 7410 Salvage value 0 EBT 4670 -6450 23190 30590 less Tax @35% 1634.5 0 8116.5 10706.5 EAT 3035.5 -6450 15073.5 19883.5 add Depriciation 33330 44450 14810 7410 Cash flow -100000 36365.5 38000 29883.5 27293.5

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