Question
You have been hired by Drs. Dewey, Cheetham and Howe to help with NPY analysis tor a replacement project. These three New Haven radiologists need to replace their existing, aging X-Ray equipment with new imaging equipment. They have calculated all the necessary figures but are unsure about how to account for the sale of their old machine. The original depreciation basis of the old machine is $200,000 and the accumulated depreciation follows the 5 year MACRS. They sold the old machine alter the 4^th year for $85.000 cash. Assume a tax rate for the company is 40 percent. What is the book value of the old X-Ray machine? What is the taxable gain (loss) on the sale of the old equipment? Calculate the tax on the gain (loss). What is the net cash How from the sale of the old equipment? Is this an inflow or an outflow Assume they could only sell the old equipment for $5,000. Recalculate parts b-d. Like risk investments have a return of 10%. What is the NPV in total if they sold the old machine for $5,000 and operated the new machine for 6 years, using 5 year MACRS depreciation, and had 6 years of $150,000 incremental cash flows with no change in net working capital, no salvage value and no additional expenses?
Explanation / Answer
MACRS Rate Depreciation Book Value Year Cost of Old machine $ 200,000 20% 40000 $ 160,000 1 $ 200,000 32% 64000 $ 96,000 2 $ 200,000 19.20% 38400 $ 57,600 3 $ 200,000 11.52% 23040 $ 34,560 4 $ 200,000 11.52% 23040 $ 11,520 5 $ 200,000 5.76% 11520 $ - 6 Book value after year 4 $ 34,560 Sale Proceeds $ 85,000 Taxable Gain $ 50,440 Tax @ 40% $ 20,176 Net Cash Inflow After Tax $ 64,824 a) $ 34,560 b) $ 50,440 c) $ 20,176 d) $ 64,824
