The J. J. Hill Company is considering new digging equipment machine. The existing digging equipment cost $1,000,000 five years ago and is being depreciated using MACRS, when classified as a 5-year asset. Hill’s management estimates the old equipment can be sold for $200,000. The new equipment costs $1,200,000 and would be depreciated over five years using MACRS. At the end of the fifth year, Hill’s management intends to sell the new equipment for $400,000. The new equipment is more efficient and would reduce expense by $200,000 per year for the next five years. The marginal tax rate is 35%.
(a) What are the cash flows related to the acquisition of the new equipment?
(b) What are the cash flows related to the disposition of the old equipment?
(c) What are the cash flows related to the disposition of the new equipment?
(d) What are the operating cash flows for each year?
(e) What the net cash flows for each year?
|a)||Cash outflow for acquisition of new machine =||1200000||Answer|
|b)||Sale value of old machine||200000|
|Book Value of old machine = 1000000*5.76% (6th year depreciation) =||57600|
|Gain on sale||142400|
|Tax on gain = 142400*35% =||49840|
|NET AFTER TAX CASH INFLOW ON SALE OF OLD MACHINE = 200000-49840 =||150160||Answer|
|c)||Sale value of the new machine at t5||400000|
|Book value at t5 = 1200000*5.76% =||69120|
|Gain on sale||330880|
|Tax on gain = 330880*35% =||115808|
|NET AFTER TAX CASH INFLOW ON SALE OF NEW MACHINE = 400000-115808 =||284192||Answer|
|Before tax savings in expense||200000||200000||200000||200000||200000|
|Depreciation (MACRS 5 Year)||240000||384000||230400||138240||138240|
|Net savings before tax||-40000||-184000||-30400||61760||61760|
|Tax at 35%||-14000||-64400||-10640||21616||21616|
|Net savings after tax||-26000||-119600||-19760||40144||40144|
|Net cash flows for each year||-1049840||214000||264400||210640||178384||462576|