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    Incremental after-tax cash flows

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    Company Z is considering upgrading their old machine with a new machine.

    EXISTING MACHINE:
    Cost = $100,000
    Purchased 2 years ago
    Depreciation using MACRS over 5-year recovery schedule
    Current Market Value = $105,000
    Five year usable life remaining
    40% tax rate on ordinary and capital gains

    Earnings before Depreciation and Taxes
    year 1 $160,000
    year 2 $150,000
    year 3 $140,000
    year 4 $140,000
    year 5 $140,000

    PROPOSED MACHINE:
    Cost = $150,000
    Installation = $20,000
    Depreciation using MACRS over 5-year recovery schedule
    5 year usable life expected
    40% tax rate on ordinary and capital gains

    Earnings before Depreciation and Taxes
    year 1 $170,000
    year 2 $170,000
    year 3 $170,000
    year 4 $170,000
    year 5 $170,000

    Summarize the incremental after-tax cash flow(relevant cash flows) for years t=0 through t=5

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    https://brainmass.com/business/accounting/incremental-after-tax-cash-flows-356336

    Solution Preview

    New Machine Cost 170,000
    Old machine Book Value 48,000 Old Equipment Depreciation under 5 year MACRS
    Sale price of old machine 105,000 Year 1 2 3 4 5 6
    Gain on Sale 57,000 Rate 0.200 0.320 0.192 0.115 0.115 0.058
    Tax on Gain (40%) 22,800 Depreciation 20,000 32,000 19,200 11,500 11,500 5,800
    After Tax Receipt 82,200

    Incremental Depreciation Schedule ...

    Solution Summary

    The solution explains how to calculate the incremental after-tax cash flows

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