Bulldog Inc. purchased a leather-cutting machine seven years ago. The cost of th
ID: 2794143 • Letter: B
Question
Bulldog Inc. purchased a leather-cutting machine seven years ago. The cost of the machine was $11,200. It was epected to be used for 10 years. The machine has been depreciated on a straight-line basis with an estimated salvage value of $1,200. The machine can be sold for $3,500 today.
Bulldog is considering the purchase of a new leather-cutting machine to replace exisiting machine. Having the new machine will result in an increase of revenue $13,000, but the operating costs will also increase by $6,000 for 3 years. The new machine cost $14,000, with an expected salvage of $2,000 at the end of the third year. The new machine will be depreciated using MACRS method, and is considered a 3-year property. There will be an increase of $1,600 in net working capital. Gorilla's tax rate is 40% and cost of capital is 16%.
What is the after-tax selling price of the old machine? Answer is $3,780. How did I get this> show work'
What is the net initial investment for the new machine? answer is -$11,820 How did I get this>show work
Explanation / Answer
The old machinery was purchased at $11200
had a salvage value of 1200
Thus depreciation for 10 years on SLM basis = 11200-1200 / 10 = 1000 per year
After 7 years the machines total depreciation would be 7*1000 = 7000
and thus the book value of machine would be 11200-7000 = 4200
now as 7 years have passed it can be sold for 3500 and thus its savlvage value is 3500
After tax selling price = salvage + WCinv - Tax*(salvage-bookvalue)
=3500+0 - 0.4*(3500-4200)
=3500 - 0.4*(-700)
=3500 - (-280)
=3780
New machine cost = FCinv = 14000
Working capital increases = WCinv = 1600
Replacement initial outlay = FCinv + WCinv - old salvage + Tax*(old salvage- old bookvaue)
=14000+1600 - 3500 + 0.4*(3500-4200)
=12100 + -(280)
=11820
and as its initial outlay its cash outflow and thus denoted by negative sign as -$11820
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