fm12 5 - the MACRS allowance percentages of 0.33, 0.45, and...

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Answers and Solutions: 12 - 5 12-4 a. The net cost is $126,000: Price ($108,000) Modification (12,500) Increase in NWC (5,500 ) Cash outlay for new machine ($126,000 ) b. The operating cash flows follow: Year 1 Year 2 Year 3 1. After-tax savings $28,600 $28,600 $28,600 2. Depreciation tax savings 13,918 18,979 6,326 Net cash flow $42,518 $47,579 $34,926 Notes: 1. The after-tax cost savings is $44,000(1 - T) = $44,000(0.65) = $28,600. 2. The depreciation expense in each year is the depreciable basis, $120,500, times
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Unformatted text preview: the MACRS allowance percentages of 0.33, 0.45, and 0.15 for Years 1, 2, and 3, respectively. Depreciation expense in Years 1, 2, and 3 is $39,765, $54,225, and $18,075. The depreciation tax savings is calculated as the tax rate (35%) times the depreciation expense in each year. c. The terminal year cash flow is $50,702: Salvage value $65,000 Tax on SV* (19,798) Return of NWC 5,500 $50,702 BV in Year 4 = $120,500(0.07) = $8,435. *Tax on SV = ($65,000 - $8,435)(0.35) = $19,798....
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