Company faces the decision to either keep an older, more expensive machine, or r
ID: 2615300 • Letter: C
Question
Company faces the decision to either keep an older, more expensive machine, or replace it with a newer machine, which has a limited technical lifetime. All the available data can be found in the table below:
Using only the above data, please determine:
The relevant cashflows in the next 3 years (name every relevant cashflow separately).
Old machine acquisition cost New machine acquisition cost Bookvalue old machine today Yearly operational (outlay) cost old machine Yearly operational (outlay) cost new machine Sales value old machine today Sales value old machine end of useful life Tax rate Remaining useful life old machine in years Useful life new machine in years 80.000,00 50.000,00 30.000,00 16.000,00 9.000,00 31.000,00 25%Explanation / Answer
Book value of old machine today = 30,000
Sale value of old machine today = 31,000
Hence, gain on sale of old machine = 31,000 - 30,000
= 1,000
Cash outflow in year 0 = Aquisition cost of new machine - sale price of old machine + Tax on gain on sale of old machine
= 50,000 - 31,000 + ( 1,000 x 25% )
= 19,250
Annual depreciation of old machine = 30,000/3
= 10,000
Annual depreciation of new machine = 50,000/3
= 16,667
Incremental cash inflows in year 1, year 2 and year 3
Hence, annual cash inflows will be 6,917 for year1 , year 2 and year 3.
Old machine New machine Change Annual depreciation 10,000 16,667 - 6,667 Annual operation cost 16,000 9,000 7,000 Net increase in revenue 333 Less: tax @25% - 83 Profit after tax 250 Add: Depreciation 6,667 Cash flow after tax 6,917Related Questions
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