The Taylor corporation is using a machine that originally cost $88,000. The mach

Question

The Taylor corporation is using a machine that originally cost $88,000. The machine is being depreciated by the straight-line method over 8 years ($11,000 per year) and has 4 years of depreciation remaining. The machine has a book value of $44,000 and a current market value of $40,000.

Jacqueline Elliot, the CFO of Taylor, is considering replacing this machine with a newer model costing $75,000. The new machine will save $5,000 in after-tax earnings each year for the next 6 years. The new machine is in the 5-year MACRS category. Taylor corporation is in the 34% tax bracket and has a 10% cost of capital.

1)Calculate the cash inflows from the sale of the old machine

2)Caluclate the cost of the next machine

PLEASE SHOW ALL WORK

Explanation / Answer

YEARS

MACRS DEPRECIATION RATE

DEPRECIATION

=75000*DEPRECIATION RATE

AFTER TAX EARNINGS SAVINGS

CASHFLOW = DEPRECIATION + AFTER TAX EARNINGS SAVINGS

0

75000

YEARS

MACRS DEPRECIATION RATE

DEPRECIATION

=75000*DEPRECIATION RATE

AFTER TAX EARNINGS SAVINGS

CASHFLOW = DEPRECIATION + AFTER TAX EARNINGS SAVINGS

0

75000

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