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Prob_8_21_CLASS_EXERCISE

Prob_8_21_CLASS_EXERCISE - 8-21 Relevant Cash Flows for...

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8-21. Integrative–Determining Relevant Cash Flows for Replacement Decision a. Initial investment: Installed cost of new asset = Cost of new asset \$105,000 + Installation costs 5,000 Total cost of new asset \$110,000 - After-tax proceeds from sale of old asset = Proceeds from sale of old asset (70,000) + Tax on sale of old asset* 16,480 Total proceeds from sale of old asset (53,520) + Change in working capital 12,000 Initial investment \$68,480 * Book value of old asset: [1 - (.20 + .32)] x \$60,000 = \$28,800 \$70,000 - \$28,800 = \$41,200 gain on sale of asset \$31,200 recaptured depreciation x .40 = \$12,480 \$10,000 capital gain x .40 = 4,000 Total tax of sale of asset = \$16,480 b. C ALCULATION OF O PERATING C ASH I NFLOWS Profits Before Operating Depreciation Depre- Net Profits Net Profits Cash Year and Taxes ciation Before Taxes Taxes After Taxes Inflows New Grinder 1 \$43,000 \$22,000 \$21,000 \$ 8,400 \$12,600 \$34,600 2 43,000 35,200 7,800 3,120 4,680 39,880 3 43,000 20,900 22,100 8,840 13,260 34,160 4 43,000 13,200 29,800 11,920 17,880 31,080 5 43,000 13,200 29,800 11,920 17,880 31,080 6 --0- 5,500 -5,500 -2,200 -3,300 2,200 Existing Grinder 1 \$26,000 \$11,400 \$14,600 \$5,840 \$ 8,760 \$20,160 2 24,000 7,200 16,800 6,720 10,080 17,280 3 22,000 7,200 14,800 5,920 8,880 16,080 4 20,000 3,000 17,000 6,800 10,200 13,200 5 18,000 -0- 18,000

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