INITIAL INVESTMENT FOR REPLACEMENT | |||||||||
A | Total Cost of new asset | $240,000 | |||||||
B | Current market Value of old equipment | $110,000 | |||||||
C | Accumulated Depreciation of old equipment | $20,000 | (100000/5) | ||||||
D | Current book value of old equipment | $80,000 | (100000-20000) | ||||||
E=B-D | Gain on sale of old equipment | $30,000 | (110000-80000) | ||||||
F=E*30% | Tax on gain on sale of old equipment | $9,000 | |||||||
G=A-(B-F) | Net Cost of New Equipment | $139,000 | |||||||
Cash Flow in Year 0 | -$139,000 | ||||||||
OPERATING CASH FLOW | |||||||||
Total Cost of New Equipment | $240,000 | ||||||||
Salvage Value | $0 | ||||||||
Useful Life in years | 8 | ||||||||
Annual Depreciation of New Equipment | $30,000 | (240000/8) | |||||||
Annual Depreciation of old Equipment | $20,000 | ||||||||
Incremental Depreciation | $10,000 | ||||||||
Annual Depreciation Tax shield | $3,000 | (10000*30%) | |||||||
OPERATING CASH FLOW | |||||||||
Tax Rate=30% | |||||||||
N | A | B=A*(1-0.3) | C | D=B+C | |||||
Year | Before tax annual saving | After Tax annual saving | Depreciation Tax shield | Operating Cash Flow | |||||
1 | $80,000 | $56,000 | $3,000 | $59,000 | |||||
2 | $80,000 | $56,000 | $3,000 | $59,000 | |||||
3 | $80,000 | $56,000 | $3,000 | $59,000 | |||||
4 | $80,000 | $56,000 | $3,000 | $59,000 | |||||
Terminal Cash Flow | |||||||||
Salvage Value of New Equipment | $0 | ||||||||
Accumulated Depreciation | $120,000 | (30000*4) | |||||||
Book Value of the new equipment | $120,000 | (240000-120000) | |||||||
Loss on Disposal of new equipment | $120,000 | ||||||||
Tax Saving on Loss =120000*30% | $36,000 | ||||||||
Total Cash Flow in Year 4 | $95,000 | (59000+36000) | |||||||
Year | Relevant Cash Flow | ||||||||
0 | -$139,000 | ||||||||
1 | $59,000 | ||||||||
2 | $59,000 | ||||||||
3 | $59,000 | ||||||||
4 | $95,000 | ||||||||
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