You have been hired by Drs. Dewey. Cheetham and Howe to help with NPV analysis f

Question

You have been hired by Drs. Dewey. Cheetham and Howe to help with NPV analysis for a replacement project. These three New Haven radiologists need to replace their existing, aging X-Ray equipment with new imaging equipment. They have calculated all the necessary figures but are unsure about how to account for the sale of their old machine. The original depreciation basis of the old machine is &200,000 and the accumulated depreciation follows the 5 year MACRS. They sold the old machine after the 4th year for $85,000 cash. Assume a tax rate for the company is 40 percent. What is the book value of the old X-Ray machine What is the taxable gain (loss) on the sale of the old equipment Calculate the tax on the gain (loss). What is the net cash flow from the sale of the old equipment Is this an inflow or an outflow Assume the new imaging equipmene costs $400,000 and they do not expect a change in net working capital. Calculate the inctemental cash flow for I_o. Assume they could only sell the old equipment for $5,000. Recalculate parts b-d. Like risk investments have a return of 10%. What is the NPV in total if they sold the old machine for $5,000 and operated the new machine for 6 years, using 5 year MACRS depreciation, and had salvage value and noadditional expenses

Explanation / Answer

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 MACRS Depreciation 5yrs 20% 32% 19.2% 11.52% 11.52% 5.76% Tax basis of Machine           200,000 Depreciation           40,000           64,000          38,400.0       23,040.00 Total depreciation for 4 yrs           165,440 a Book Value after 4 yrs              34,560 Sale value                85,000 b Taxable Gain              50,440 Tax rate 40% 40% c Tax on the gain              20,176 d Net cash flow from the sale of equipment= $ 85,000.00 inflow e New Imaging M/c cost           400,000 Less : sales procedds old m/c           (85,000) Net cash flow year t0= $ 315,000.00 outflow f Book Value after 4 yrs              34,560 Sale value                  5,000 Capital Loss              29,560 Tax rate 40% Tax on the loss                       -   g NPV calculation. The incremental cash flow type not mentioned. Assuming the incremental cash flow is after tax net incremental earning plus depreciation =$100,000 per year, so depreciation is not again considered or tax not considered Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Initial cost         (400,000) Sale value old machine                5,000 Net Incremental cash flow         100,000         100,000           100,000           100,000         100,000      100,000 Discount factor @10%              1.0000           0.9091           0.8264              0.7513             0.6830           0.6209        0.5645 PV of Cash flows         (395,000)           90,909           82,645              75,131             68,301           62,092        56,447 NPV = $   40,526.07 Actual NPV result may vary with the given result to you due to difference in discounting factor digits used, Here 4 digit factor used for accuracy.

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