Explore BrainMass

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?

    © BrainMass Inc. brainmass.com December 24, 2021, 6:15 pm ad1c9bdddf
    https://brainmass.com/business/management-accounting/figuring-operating-cost-and-capital-101084

    Attachments

    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.

    Answer:

    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!

    © BrainMass Inc. brainmass.com December 24, 2021, 6:15 pm ad1c9bdddf>
    https://brainmass.com/business/management-accounting/figuring-operating-cost-and-capital-101084

    Attachments

    ADVERTISEMENT