Explore BrainMass

# Operating Cost

Not what you're looking for? Search our solutions OR ask your own Custom question.

This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

I need help filling in the blanks and what formulas are used to arrive at those conclusions.

Year
0 1 2 3 4
Investment outlay
Equipment cost (\$200,000)
Installation (40,000)
Increase in inventory (25,000)
Increase in A/P 5,000
Initial net investment (260,000)

Operating cash flows
Units sales 100,000 100,000 100,000 100,000
Price per unit \$2.00 \$2.00 \$2.00 \$2.00
Total revenues \$200,000 \$200,000 \$200,000 \$200,000

Operating costs (w/o deprn) \$120,000 \$120,000 \$120,000 \$120,000
Depreciation 36,000 16,800
Total costs \$199,200 \$228,000

Operating income \$44,000
Taxes on operating income 320 25,280
A-T operating income \$26,400
Depreciation 79,200 36,000
Operating cash flow \$79,680 \$54,720

Terminal year cash flows
Recovery of net working capital
Salvage value
Tax on salvage value
Total termination cash flow

Net cash flows
Net cash flows (\$260,000) \$89,720

What would have happened if the machinery were sold for less than its book value?

Â© BrainMass Inc. brainmass.com December 24, 2021, 6:15 pm ad1c9bdddf

## SOLUTION This solution is FREE courtesy of BrainMass!

Please see the attached file.

Year
0 1 2 3 4
Investment outlay
Equipment cost (\$200,000)
Installation (40,000)
Increase in inventory (25,000)
Increase in A/P 5,000
Initial net investment (260,000)

Operating cash flows
Units sales 100,000 100,000 100,000 100,000
Price per unit \$2.00 \$2.00 \$2.00 \$2.00
Total revenues \$200,000 \$200,000 \$200,000 \$200,000

Operating costs (w/o deprn) \$120,000 \$120,000 \$120,000 \$120,000
Depreciation 36,000 16,800
Total costs \$199,200 \$228,000

Operating income \$44,000
Taxes on operating income 320 25,280
A-T operating income \$26,400
Depreciation 79,200 36,000
Operating cash flow \$79,680 \$54,720

Terminal year cash flows
Recovery of net working capital
Salvage value
Tax on salvage value
Total termination cash flow

Net cash flows
Net cash flows (\$260,000) \$89,720

What would have happened if the machinery were sold for less than its book value?
Answer: A tax credit is obtained in such a case.

Year
0 1 2 3 4
Investment outlay
Equipment cost (\$200,000)
Installation (\$40,000)
Increase in inventory (\$25,000)
Increase in A/P 5,000
Initial net investment (\$260,000)

Operating cash flows
Units sales 100,000 100,000 100,000 100,000
Price per unit \$2.00 \$2.00 \$2.00 \$2.00
Total revenues \$200,000 \$200,000 \$200,000 \$200,000

Operating costs (w/o deprn) \$120,000 \$120,000 \$120,000 \$120,000
Depreciation \$79,200 \$108,000 36,000 16,800
Total costs \$199,200 \$228,000 \$156,000 \$136,800

Operating income \$800 (\$28,000) \$44,000 \$63,200
Taxes on operating income 320 (\$11,200) \$17,600 25,280
A-T operating income \$480 (\$16,800) \$26,400 \$37,920
Depreciation 79,200 \$108,000 36,000 16,800
Operating cash flow \$79,680 \$91,200 \$62,400 \$54,720

Terminal year cash flows
Recovery of net working capital \$20,000
Salvage value \$25,000
Tax on salvage value (\$10,000)
Total termination cash flow \$35,000

Net cash flows
Net cash flows (\$260,000) \$79,680 \$91,200 \$62,400 \$89,720
Note: Tax rate =40%
Calculations are self explanatory ( i.e After tax Operating income = Operating income - Taxes , and so on)

This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

Â© BrainMass Inc. brainmass.com December 24, 2021, 6:15 pm ad1c9bdddf>