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machine will cost $191,000 and will require $29,100 in installation costs. It wi

ID: 2794315 • Letter: M

Question

machine will cost $191,000 and will require $29,100 in installation costs. It will be depreciated under MACRS using a 5-year recovery period (see the table ncrease in net working capital will be required to support the new machine. The firm's managers plan to evaluate the potential end of 4 years to net $14,800 the new machine. The firm is subject to a 40% tax rate for the applicable depreciation percentages). A $23,000 over a 4 year period. They estmate that the old machine could be sold at th axes; the new machine at the end of 4 years will be worth $74,000 before taxes. Calculate the terminal cash flow at the end of year 4 that is relevant to the proposed purchase of Data Table Proceeds from sale of new machine Tax on sale of new machine $ conbents into a spreadsheet) Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes Tax on sale of old machine 10 year Change in net working capital Terminal cash fow 12% Totals 100%

Explanation / Answer

After 4 years proceed from sale of new machine = $74,000

Tax = 40%

So the tax on sale = (Market Value - Book Value at the end of year 4)*(1-tax)

Market value = $74,000

Book value is the remaining amount after being depreciated for 4 years

Firm is using MACRS 5 years depreciation schedule

So, Depreciation for 4 years = 20 + 32 + 19 + 12 = 83%

Book value = Purchase amount - total depreciation for four years

Purchse amount = Cost of machione + installation cost = $191,000 + $29,100 = 220,100

Depreciation for 4 years = (0.83*220100) = $182,683

Book value = 220,100 - 182,683 = $37,417

Tax = (Market value - book value)*(t) = (74000 - 37417)*(0.4) = $14,633.20

Total after tax proceed from sale of new machine = Market value - tax = 74000-14633.20 = $59,366.80

Proceeds from sale of old machine = $14,800

tax = (market value - book value)*(t)

machine is fully depreciated so book value is zero

Therefore, tax = (14800-0)*(0.4) = $5,920

Total after tax proceed from sale of old machine = Market value - tax = 14,800 - 5,920 = $8,880

Change in net working capital = $23,000

Terminal cash flow = after tax proceed from sale of new machine + after tax proceed from sale of old machine + change in net working capital = 59,366.80 + 8,880 + 23,000 = $91,246.80