11. Calculating initial investment installed cost of a proposed computer-control
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11. Calculating initial investment installed cost of a proposed computer-controlled automatic-feed roaster will be $130,000. The firm has a chance to sell its 5-year-old roaster for $34,100. The existing roaster originally cost $59,800 and was being depreciated using MACRS and a 7-year recovery period (see the table 1). DuPree pays taxes at a rate of 40% on ordinary income and capital gains a. What is the book value of the existing roaster? b. Calculate the after-tax proceeds of the sale of the existing roaster c. Calculate the change in net working capital using the following figures DuPree Coffee Roasters, Inc., wishes to expand and modernize its facilities. The Anticipated Changes in Current Assets and Current Liabilities Accruals Inventory Accounts payable Accounts receivable Cash Notes payable - $20,000 +50,000 +40,800 + 69,200 + 16,000 d. Calculate the initial investment associated with the proposed new roaster a. The remaining book value of the existing roaster is $ b. The after-tax proceeds of the sale of the existing roaster will be $ c. The change in net working capital will be $ d. The initial investment associated with the proposed new roaster will be S 1: Data Table (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) . (Round to the nearest dollar.) (Round to the nearest dollar.) . (Round to the nearest dollar.) . (Round to the nearest dollar.) Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes Percentage by recovery year* Recovery year 3 years 3'3% 45% 15% 7% 7 years 5 years 20% 32% 19% 12% 12% 5% 10 years 10% 18% 14% 12% 9% 8% 7% 6% 6% 5% 4% 100% 2 25% 18% 12% 9% 9% 9% 4% 4 6 7 9 10 Totals 100% 100% 100% These percentages have been rounded to the nearest whole percent to simplify calculations while retaining realism. To calculate the actual depreciation for tax purposes, be sure to apply the actual unrounded percentages or directly apply double-declining balance (200%) depreciation using the half-year conventionExplanation / Answer
Depreciation is the process of allocating a fixed assets cost to expense over its useful life. With passage of time assets value keep on reducing due to usage and wear & tear. It does not represent a cash transaction, but it indicates how much of an asset's value has been used up over time.
MACRS is an abbrevaition used for modified accelerated cost recovery system. It is one of the methods to calculate depreciation on assets. Under this system, depreciation amount is higher in early years and lower in later years when compared to the straight-line method. This method is used in the United States to calculate tax deductions on account of depreciation on assets.
a) The book value of asset is calculated by deducting accumulated depreciation from cost of asset. Given that existing roaster cost is $59,800 and it is sold after 5 years. Depreciation is charged using MACRS and a 7 year recovery period.
Therefore, accumulated depreciation percentage (using actual percentages) = 77.69% (14.29 + 24.49+ 17.49+12.49+8.93)
Book value of roaster = Original cost of roaster - Accumulated depreciation
Book value of roaster = $59,800 - (77.69% *$59,800)
Book value of roaster = $59,800 - $46,458.62
Book value of roaster = $13,341.38
The remaining book value of the existing roaster is $13,341.
b) The existing roaster can be sold for $34,100 while its book value is $13,341.38. So, profit on selling existing roaster will be as follows:
Profit on selling existing roaster = Selling price - Book value of existing roaster
Profit on selling existing roaster = $34,100 - $13,341.38
Profit on selling existing roaster = $20,758.62
Tax on profit on sale of existing roaster = $8,303.45 ( 40% * $20,758.62).
After- tax proceeds of the sale of existing roaster is the difference between sale price and tax on profit of sale of roaster,
After- tax proceeds of the sale of existing roaster = $34,100 - $8,303.45
After- tax proceeds of the sale of existing roaster = $25,796.55
Therefore, the after-tax proceeds of the sale of the existing roaster will be $25,796.55.
c) Change in working capital is the difference between current assets and current liabilities.It is also known as net working capital.
Net working capital = Current assets - Current liabilities.
Net working capital = (Inventory+ Accounts receivables+Cash) - ( Accruals+Accounts payable+Notes payable)
Net working capital = ($50,000+$69,200+$0) - ($20,000+$$40,800+$16,000)
Net working capital = $42,400
Therefore, change in net working capital will be $42,400.
d) The initial investment associated with the proposed new roaster will be calculated as follows:
Initial investment associated with the proposed new roaster = Initial cost of new roaster - (After- tax proceeds of the sale of existing roaster+Net working capital)
Initial investment associated with the proposed new roaster = $130,000 - ($25,796.55+$42,400)
Initial investment associated with the proposed new roaster = $61,803.45
The initial investment associated with the proposed new roaster will be $61,803.45.
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