please give a written answer, please do not use excel as it has to be written out. thank you.
Homework Answers
Answer:
Cash flow in Year 1 = $42,180
Working Notes:
| Year 1 | Year 2 | Year 3 | Year 4 | ||
| Incremental Revenue | [1] | 50,000.00 | 50,000.00 | 50,000.00 | 50,000.00 |
| Incremental Cost | [2] | 5,000.00 | 5,000.00 | 5,000.00 | 5,000.00 |
| Depreciation | [3] | 37,950.00 | 51,750.00 | 17,250.00 | 8,050.00 |
| EBIT | [4] =[ 1-2-3] | 7,050.00 | (6,750.00) | 27,750.00 | 36,950.00 |
| Taxes | [5]=[4*40%] | 2,820.00 | - | 11,100.00 | 14,780.00 |
| Net Income | [6]=[4-5] | 4,230.00 | (6,750.00) | 16,650.00 | 22,170.00 |
| OCF | [7]=[6+3] | 42,180.00 | 45,000.00 | 33,900.00 | 30,220.00 |
| Depreciation rate under 5 year MACRS | ||||
| Years | Depreciation rate | Equipment Value | Depreciation Expense | Asset Value |
| 1 | 33% | $ 115,000.00 | $ 37,950.00 | $ 77,050.00 |
| 2 | 45% | $ 115,000.00 | $ 51,750.00 | $ 25,300.00 |
| 3 | 15.00% | $ 115,000.00 | $ 17,250.00 | $ 8,050.00 |
| 4 | 7.00% | $ 115,000.00 | $ 8,050.00 | $ - |
Terminal Non operating cash flow at the end of 3rd Year.
Terminal Cash flow = $15,220/-
Working Note:
| Terminal flow (Y3) | |
| Salvage value after tax | 12,220.00 |
| Add recapture of working capital | 3,000.00 |
| Total terminal flow | 15,220.00 |
Tax on salvage value:
Step 1: Ascertain the profit on sale of asset (Profit = salvage value - book value)
Step 2:Calculate tax on the profit
Salvage Value = 15,000
Book Value = 8,050
Profit = 15000-8050 = 6,950
Tax = 6,950*40% = 2,780.
Salvage value after tax = 15000-2780 = 12,220.
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