Help with this question please L026-2 through L026-4 CASE 26.1 How Much Is That

Question

Help with this question please

L026-2 through L026-4 CASE 26.1 How Much Is That Laser in the Window? The management of Metro Printers is considering a proposal to replace some existing equip- ment with a new highly efficient laser printer. The existing equipment has a current book value of $2,200,000 and a remaining life (if not replaced) of 10 years. The laser printer has a cost of $1,300,000 and an expected useful life of 10 years. The laser printer would increase the company's annual cash flows by reducing operating costs and by increasing the company's ability to gener- ate revenue. Susan Mills, controller of Metro Printers, has prepared the following estimates of the laser printer's effect on annual earnings and cash flow: Estimated increase in annual cash flows (before taxes) Reduction in annual depreciation expense Estimated increase in income before income taxes . _ . Increase in annual income taxes (40%) . . . . . . . . . . . . . . . . . . . . Estimated increase in annual net income. . . . . . . . . . . . . . .. . Estimated increase in annual net cash flows 90,000 $340,000 136,000 $204,000 $114,000

Explanation / Answer

a) Present value of estimated incremental annual cash flows for 10 years = $114,000 x PVIFA(15%,10) = $114,000 x 5.019 $572,166.00 Present value of proceeds from sale of existing equipment $200,000.00 Present value of tax savings from loss on disposal of existing equipment, realized in 1 year = $800,000 × .870 $696,000.00 Total present value $1,468,166.00 Amount to be invested (to be paid immediately) -$1,300,000.00 Net present value of proposal $168,166.00 b) The cost of the laser printer is $1,300,000, not $2,500,000 as Adams suggests.The $1,200,000 is a sunk cost and its already incurred and its part of the cost of the old equipment, not the printer.

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