Solution:
Solving first four questions as HOMEWORKLIB's guidelines:
1.a)Calculation of Initial cash outlay
=Price of new machine-after tax sale proceed of old machine
=$1150,000-$235,000
=$915,000
b)Statement showing depreciation allowances:
Year | Depreciation allowance,New(Price*rate) | Depreciation allowance,Old(given) | Change in Depreciation |
1 | $1150,000*0.20=$230,000 | $120,000 | $110,000 |
2 | $1150,000*0.32=$368,000 | $120,000 | $248,000 |
3 | $1150,000*0.19=$218,500 | $120,000 | $98,500 |
4 | $1150,000*0.11=$126,500 | $120,000 | $6,500 |
5 | $1150,000*0.06=$69,000 | $120,000 | -$51000 |
c)Calculation of Incremental net cash flows:
Year | 1 | 2 | 3 | 4 | 5 |
Annual saving | $210,000 | $210,000 | $210,000 | $210,000 | $210,000 |
Less:Incremental Depreciation | $110,000 | $248,000 | $98,500 | $6,500 | -$51000 |
Net Incremental saving | $100,000 | -$38,000 | $111,500 | $203,500 | $261,000 |
Less: Tax @35% | $35,000 | $0 | $39,025 | $71,225 | $91,350 |
Saving after tax | $65000 | -$38,000 | $72,475 | $132,275 | $169,650 |
Add:Depreciation | $110,000 | $248,000 | $98,500 | $6,500 | -$51000 |
Add:Salvage Value of machine | 0 | 0 | 0 | 0 | $120,000 |
Net Incremental Cash flows | $175,000 | $210,000 | $170,975 | $138,775 | $238,650 |
d)Calculation of Net present value of machine(NPV):
NPV=Present value of Net Incremental Cash flows-Initial cash outlay
Present value of Net Incremental Cash flows is;
=175,000/(1+0.12)^1+210,000/(1+0.12)^2+170,975/(1+0.12)^3+138,775/(1+0.12)^4+238,650/(1+0.12)^5
=$668,967.78
NPV=$668,967.78-$915,000
=-246,032.22
Since the NPV of machine is negative,hence the firm should not purchase the machine.
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