please EXPLAIN with FULL STEPS.... thanks The Gilbert Instrument Corporation is
ID: 2654453 • Letter: P
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please EXPLAIN with FULL STEPS.... thanks
The Gilbert Instrument Corporation is considering replacing the wood steamer it currently uses to shape guitar sides. The steamer has 6 years of remaining life. If kept, the steamer will have depreciation expenses of S650 for five years and $325 for the sixth year. Its current book value is $3,575, and it can be sold on an Internet auction site for $4,150 at this time. If the old steamer is not replaced, it can be sold for $800 at the end of its useful life. (11-9) Replacement Analysis Gilbert is considering purchasing the Side Steamer 3000, a higher-end steamer, which costs $12,000 and has an estimated useful life of 6 years with an estimated salvage value of $1,500. This steamer falls into the MACRS 5-year class, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The new steamer is faster and allows for an output expansion, so sales would rise by $2,000 per year; the new machine's much greater efficiency would reduce operating expenses by $1,900 per year To support the greater sales, the new machine would require that inventories increase by $2,900, but accounts payable would simultaneously increase by $700. Gilbert's marginal federal-plus-state tax rate is 40%, and its WACC is 15%. Should it replace the old steamer?Explanation / Answer
Step1:Computation of cash infow after tax per year increased by Side Steamer.We have,
Step2: Computation of present value of Incremental Cash flow Afer tax.We have,
Hence, the present value of Incremental Cash flow Afer tax is $ 5,588.66
Step3:Computation of net saving if wood steamer shall continue.We have,
Sum of Present value of saving = $ 2,664.15
Net incremental gain if sale of wood steamer = 4,150 - 2,664.15 =$ 1,485.85
Total incremental gain from sale of wood steamer = 5,586.66 + 1,485.85 = $ 7,072.51
Hence, The Gilbert Instrument Corporation should replace the old steamer.
Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Net Sales increased ($) 2,000 2,000 2,000 2,000 2,000 2,000 Reduce operating costs($) 1,900 1,900 1,900 1,900 1,900 1,900 Account payble($) 700 700 700 700 700 700 Less: increased inventries($) 2,900 2,900 2,900 2,900 2,900 2,900 Less: Depreciation($) 2,400 3,072 1,253 608 538 238 Gross income ($) - 700 -1,372 447 1,092 1,162 1,462 Less: Tax @ 40% 0 0 179 437 465 585 Net Income after tax -700 -1,372 268 655 697 877 Add: Depreciation 2,400 3,072 1,253 608 538 238 Cash Flow After Tax($) 1,700 1,700 1,521 1,263 1,253 1,115Related Questions
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