Red Beach Marine Engines Ltd must develop the relevant cash flows for a replacem

Question

Red Beach Marine Engines Ltd must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs $50,000 and has installation costs of $3,000. The asset will be depreciated using the prime cost (straight-line) method over a five-year life. The existing equipment, which originally cost $25,000 and will be sold for $10,000, was purchased four years ago and has been depreciated using the prime cost (straight-line) method over a five-year life. The new equipment is expected to result an increase in working capital by $5,000, and incremental profit before tax and depreciation is $15,000 per year. The firm has a 28% tax rate.

Q24. The initial outlay equals:
A. $63,000
B. $53,000
C. $51,600
D. $49,400
E. $43,000
Q25. The incremental after-tax cash flow from operations for year 1 is:
A. $12,368
B. $13,768
C. $15,000
D. $10,800
E. $11,240

Explanation / Answer

Answer:

Q-24: Option D ($49,400)

Q-25: Option A:

In $ Cost of proposed asset 50000 Installation Cost 3000 A Total cost of proposed asset 53000 B Add: Working capital Investment 5000 C Less: Inflow from sale of old asset* 8600 D Initial Outlay(A+B-C) 49400 Workings *Inflow from sale of old asset: In $ A Sales price of old asset 10000 Less: Curr. Book value of the asset 5000 ($25,000*1/5) Profit on sale of asset 5000 B Less: Tax on sale of asset @28% 1400 C = A-B Net inflow from sale 8600

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