Grundy Corporation purchased a piece of equipment for $240,000 three years ago.
ID: 2767439 • Letter: G
Question
Grundy Corporation purchased a piece of equipment for $240,000 three years ago. Today this equipment can be sold for $85,920. A new piece of equipment can be purchased today for $290,000. It will cost $40,000 to ship it and $20,000 to get it installed. Its estimated market value at the end of five years from today is $7,000. Both machines fall under the five year MACRS category. Its tax rate is estimated at 35% and the cost of capital is 11.5%.
Estimated gross profit from both machines is presented in the table below. Prepare the following statements:
a) Initial cost
b) After-tax cash flows for the economic life of the new machine
c) End of the project non-operating cash flows.
Year
New
Old
1
$105,000.00
$36,000.00
2
$84,000.00
$26,000.00
3
$79,000.00
$19,000.00
4
$70,000.00
$18,000.00
5
$60,000.00
-$16,000.00
Year
New
Old
1
$105,000.00
$36,000.00
2
$84,000.00
$26,000.00
3
$79,000.00
$19,000.00
4
$70,000.00
$18,000.00
5
$60,000.00
-$16,000.00
Explanation / Answer
a) Initial Cost Purchase cost of equipment 290000 Shipment cost 40000 Installation cost 20000 350000 Less sale proceeds from old machine -85920 264080 b) After Tax Cash flow for economic life of new machine 1 2 3 4 5 After Tax Cash flow 105000 84000 79000 70000 60000 Less after tax cash flow old machine -36000 -26000 -19000 -18000 16000 Incremental cash flow 69000 58000 60000 52000 76000 Add Depreciation 52,816 84,506 50,703 30,422 45,633 121,816 142,506 110,703 82,422 121,633 Salvage value after tax 4550 Total Cash flow 121,816 142,506 110,703 82,422 126,183 DF 0.90 0.80 0.72 0.65 0.58 DCF 109,252 114,626 79,861 53,327 73,219 Total DCF 430,285 c) End of the project non operating cash flow = $ 4550
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