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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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