Per 4 - Variable costs $2,916,000 $2,979,000 $3,105,000...

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Problem 3.19 In year 2, the company will have a cash outflow to pay for the cost of the new equipment. Since the equipment will be purchased in two years rather than now, the equipment will have a higher salvage value. The book value of the equipment in five years will be the initial cost, minus the accumulated depreciation, or: Book value = $10,500,000 – 1,500,500 – 2,572,500 – 1,838,445 Book value = $4,587,555 The taxes on the salvage value will be: Taxes on salvage = ($4,591,650 – 6,100,000)(.40) Taxes on salvage = –$603,340 So, the aftertax salvage value of the equipment in five years will be: Sell equipment $6,100,000 Taxes –603,340 Salvage value $5,496,660 Next, we need to calculate the variable costs each year. The variable costs of the lost sales are included as a variable cost savings, so the variable costs will be: Year 1 Year 2 Year 3 Year 4 Year 5 New $3,276,000 $3,339,000 $3,465,000 $3,654,000 $3,326,400 Lost sales –360,000 –360,000 –360,000 –360,000 –360,000
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Unformatted text preview: Variable costs $2,916,000 $2,979,000 $3,105,000 $3,294,000 $2,966,400 Now we can prepare the rest of the pro forma income statements for each year. The project will have no incremental depreciation for the first two years as the equipment is not purchased for two years. Adding back depreciation to net income to calculate the operating cash flow, we get: Year 1 Year 2 Year 3 Year 4 Year 5 Sales $6,380,000 $6,520,000 $6,800,000 $7,220,000 $6,492,000 VC 2,916,000 2,979,000 3,105,000 3,294,000 2,966,400 Fixed costs 1,700,000 1,700,000 1,700,000 1,700,000 1,700,000 Dep. - - 1,501,500 2,572,500 1,838,445 EBT $1,764,000 $1,841,000 $493,500 $346,500 $12,845 Tax 705,600 736,400 197,400 138,600 5,138 NI $1,058,400 $1,104,600 $296,100 $207,900 $7,707 Dep. - - 1,501,500 2,572,500 1,838,445 OCF $1,058,400 $1,104,600 $1,797,600 $2,364,600 $1,830,738...
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