Firm X is considering the replacement of an old machine with one that has a purc

Question

Firm X is considering the replacement of an old machine with one that has a purchase price of $80,000. The current market value of the old machine is $20,000 but the book value is $39,000. The firm's tax rate for ordinary income is 27%. What is the net cash outflow for the new machine after considering the sale of the old machine?

$60,740

$67,220

$54,870

$51,470

$77,300

$87,100

$86,300

$82,500

$84,603

$70,403

$65,203

$75,003

$80,000

$83,800

$84,600

$74,800

Firm X is considering the replacement of an old machine with one that has a purchase price of $65,000. The current market value of the old machine is $25,000 but the book value is $36,000. The firm's tax rate for ordinary income is 35%. What is the net cash outflow for the new machine after considering the sale of the old machine?

$42,020

$48,500

$36,150

$32,750

2.56

0.53

0.11

1.33

The Wet Corp. has an investment project that will reduce expenses by $20,000 per year for 3 years. The project's cost is $15,000. If the asset is part of the 3-year MACRS category (33.33% first year depreciation) and the company's tax rate is 33%, what is the cash flow from the project in year 1? (Do not round intermediate calculations. Round your answer to the nearest dollar amount.)

$16,510

$15,050

$15,830

$14,500

$46,837

$66,237

$52,037

$56,637

The Wet Corp. has an investment project that will reduce expenses by $25,000 per year for 3 years. The project's cost is $35,000. If the asset is part of the 3-year MACRS category (33.33% first year depreciation) and the company's tax rate is 34%, what is the cash flow from the project in year 1? (Do not round intermediate calculations. Round your answer to the nearest dollar amount.)

$21,246

$21,926

$20,466

$19,916

2.56

0.53

0.13

1.33

Firm X is considering the replacement of an old machine with one that has a purchase price of $80,000. The current market value of the old machine is $20,000 but the book value is $39,000. The firm's tax rate for ordinary income is 27%. What is the net cash outflow for the new machine after considering the sale of the old machine?

Explanation / Answer

Outflow = Purchase price- market price of old machine+tax-rate*(Market price - bookvalue)

Outflow = 80000-20000+(0.27*(20000-39000))

Outflow = $54870

After tax cashflow = (EBITDA-depreciation)*(1-tax-rate)+depreciation

After tax cashflow = (100000-50000)*(1-0.35)+50000

After tax cashflow = 82500

So after 2 years of depreciation the book value can be calculated as follows:

Costprice - Cost Price*(year 1 depreciation rate) -Cost Price*(year 2 depreciation rate)

115000- 115000*(0.1429) -115000*(0.2449) = 70403

After tax cashflow = (EBITDA-depreciation)*(1-tax-rate)+depreciation

After tax cashflow = (95000-45000)*(1-0.30)+45000

After tax cashflow = 80000

Outflow = Purchase price- market price of old machine+tax-rate*(Market price - bookvalue)

Outflow = 65000-25000+(0.35*(25000-36000))

Outflow = $36150

Profitability Index = (Initial investment+NPV)/(Initial investment)

PI = (900+300)/(900)

PI = 1.33

Depreciation = cost of the project * depreciation rate

After tax cashflow = (Cost saving-depreciation)*(1-tax-rate)+depreciation

After tax cashflow = (20000-(0.3333*15000))*(1-0.33)+(0.3333*15000)

After tax cashflow = (20000-5000)*(1-0.33)+(5000)

After tax cashflow = 15050

So after 2 years of depreciation the book value can be calculated as follows:

Costprice - Cost Price*(year 1 depreciation rate) -Cost Price*(year 2 depreciation rate)

85000- 85000*(0.1429) -85000*(0.2449) = 52037

Depreciation = cost of the project * depreciation rate

After tax cashflow = (Cost saving-depreciation)*(1-tax-rate)+depreciation

After tax cashflow = (25000-(0.3333*35000))*(1-0.34)+(0.3333*35000)

After tax cashflow = 20466

Profitability Index = (Initial investment+NPV)/(Initial investment)

PI = (1200+400)/(1200)

PI = 1.33

Part No. Solution 1

Outflow = Purchase price- market price of old machine+tax-rate*(Market price - bookvalue)

Outflow = 80000-20000+(0.27*(20000-39000))

Outflow = $54870

2

After tax cashflow = (EBITDA-depreciation)*(1-tax-rate)+depreciation

After tax cashflow = (100000-50000)*(1-0.35)+50000

After tax cashflow = 82500

3 Year 1 2 3 4 5 6 7 8 Depreciation Rate 14.29 24.49 17.493 12.495 8.925 8.925 8.925 4.462

So after 2 years of depreciation the book value can be calculated as follows:

Costprice - Cost Price*(year 1 depreciation rate) -Cost Price*(year 2 depreciation rate)

115000- 115000*(0.1429) -115000*(0.2449) = 70403

4

After tax cashflow = (EBITDA-depreciation)*(1-tax-rate)+depreciation

After tax cashflow = (95000-45000)*(1-0.30)+45000

After tax cashflow = 80000

5

Outflow = Purchase price- market price of old machine+tax-rate*(Market price - bookvalue)

Outflow = 65000-25000+(0.35*(25000-36000))

Outflow = $36150

6

Profitability Index = (Initial investment+NPV)/(Initial investment)

PI = (900+300)/(900)

PI = 1.33

7

Depreciation = cost of the project * depreciation rate

After tax cashflow = (Cost saving-depreciation)*(1-tax-rate)+depreciation

After tax cashflow = (20000-(0.3333*15000))*(1-0.33)+(0.3333*15000)

After tax cashflow = (20000-5000)*(1-0.33)+(5000)

After tax cashflow = 15050

8 Year 1 2 3 4 5 6 7 8 Depreciation Rate 14.29 24.49 17.493 12.495 8.925 8.925 8.925 4.462

So after 2 years of depreciation the book value can be calculated as follows:

Costprice - Cost Price*(year 1 depreciation rate) -Cost Price*(year 2 depreciation rate)

85000- 85000*(0.1429) -85000*(0.2449) = 52037

9

Depreciation = cost of the project * depreciation rate

After tax cashflow = (Cost saving-depreciation)*(1-tax-rate)+depreciation

After tax cashflow = (25000-(0.3333*35000))*(1-0.34)+(0.3333*35000)

After tax cashflow = 20466

10

Profitability Index = (Initial investment+NPV)/(Initial investment)

PI = (1200+400)/(1200)

PI = 1.33

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