Operating Cost

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)

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