# 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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## This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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