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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

#### 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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