Question: DuPree Coffee Roasters, Inc., wishes to expand and modernize its facil

Question

Question:

DuPree Coffee Roasters, Inc., wishes to expand and modernize its facilities. The installed cost of a proposed computer-controlled automatic-feed roaster will be $135,000. The firm has a chance to sell its 5-year-old roaster for $35,100. The existing roaster originally cost $59,800 and was being depreciated using MACRS and a 7-year recovery period.

DuPree is subject to a 40% tax rate.

a. What is the book value of the existing roaster?

b. Calculate the after-tax proceeds of the sale of the existing roaster.

c. Calculate the change in net working capital using the following figures:

Anticipated Changes

in Current Assets

and Current Liabilities

Accruals .................. - $ 19,200

Inventory .................... + 50,600

Accounts payable .......... + 39,300

Accounts receivable ....... + 69,900

Cash ................................... 0

Notes payable ................ +15,500

Explanation / Answer

Book value of the asset = Cost - accumulated depreciation.

Using MACRS method for 7 year recovery period,in 5 years a total of 77.69% (14.29%+24.49%+17.49%+12.49%+8.93%)of cost will be charged as accumulated depreciation.

=59800*(1-77.69%)

Book value of the existing roaster=13341.38

b) Roaster having book value $13341.38 can be sold at $35100 thus profit is $21758.62($35100-13341.38)

DuPree is subject to 40% tax rate so tax will be $8703.45(40%*21758.62)

After tax proceeds of the sale of roaster = $26396.55(35100-8703.45)

c)

Net Working Capital = Current asset - current Liabilites

=(50600+69900+26396.55)-(-19200+39300+15500)

Change in Net working capital= $111296.55

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