Bottoms Up Diaper Service is considering the purchase of a new industrial washer
ID: 2709181 • Letter: B
Question
Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $4,800 and sell its old washer for $1,200. The new washer will last for 6 years and save $1,400 a year in expenses. The opportunity cost of capital is 18%, and the firm’s tax rate is 40%.
If the firm uses straight-line depreciation to an assumed salvage value of zero over a 6-year life, what is the annual operating cash flow of the project in years 1 to 6? The new washer will in fact have zero salvage value after 6 years, and the old washer is fully depreciated.
What is project NPV? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)
What is NPV if the firm uses MACRS depreciation with a 5-year tax life? Use the MACRS depreciation schedule. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $4,800 and sell its old washer for $1,200. The new washer will last for 6 years and save $1,400 a year in expenses. The opportunity cost of capital is 18%, and the firm’s tax rate is 40%.
Explanation / Answer
Initial cash cash flow=
Cost of New Washer= $4800
After tax cash inflow of Old Washer= 1200*60%= $720
Net Cash flow at Zero Year= (4800)+720 (S4080)
Annual Operating Cash flow for the year 1-6 will be the after tax Expenses saved plus depreciation expense, So annual operating cash flow will be $1400*60%+ 800 i.e $1640
(b)
NPV is $1656.06
C: IF MACRS depreciation for 5 year is used the operating cash flow will be as under
Taxable income= Operating Revenue+Book depreciation-Tax Depreciation as per MACRS Schedule
Net Cash flow(E)
(A+B-D)
NPV = Operational cash flow-Initial cash outflow
= 6117.71-4080
=$2037.71
Year After Tax Cash flow($) PV Factor @18% NPV($) 0 - 4080 1.0000 -4080 1 $1640 0.847457 1389.83 2 $1640 0.718184 1177.82 3 $1640 0.608630 998.15 4 $1640 0.515789 845.89 5 $1640 0.437109 716.86 6 $ 0.370431 607.51 Total `` 1656.06Related Questions
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