Question

QUESTION 41 2 po Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs $50,000 and has installation costs of $3,000. The asset will be depreciated using a five-year recovery schedule; depreciation for years! through 6 is 20%, 32%, 19% 12%, 12% and 5%, respectively. The existing equipment, which originally cost $25,000 and will be sold for $10,000, has been depreciated using an MACRS five-year recovery schedule and three years of depreciation have already been taken. The new equipment is expected to result in increased incremental profits before depreciation and taxes (EBDIT) of $22,600 per year. The firm has a 40 percent tax rate. Assume no change in net working capital The annual incremental after-tax cash flow from operations for year 1 is 513,950 $16,600 525,600 $30,000

Answer 1

Ans ) $16,600

Let us first find depreciation charge

Depreciation of new equipment in year 1 = Cost x 20%

=(50000+3000) x 20%

=53000 x 20%

=10600$

Depreciation for existing equipment in year 1 ( Since already 3 years has been passed applicable rate will be of 4th year i.e 12%)

= 25000 x 12%

=3000$

Thus incremental depreciation = 10600-3000 = 10300$

Statement showing after tax cash flow for year 1

Particulars	Amount
Incremental EBDIT	22600
Less : Incremental depreciation	7600
PBT	15000
Tax @ 40%	6000
PAT	9000
Add: Depreciation	7600
After tax cash flow	16600

Thus after tax cash flow for year 1 = 16600$