Homework Answers
Current BV of old machine = purchase price*remaining life /total life
=700000*5/10 = 350000
| Time line | 0 | 1 | 2 | 3 | 4 | 5 | |
| Proceeds from sale of existing asset | =selling price* ( 1 -tax rate) | 150000 | |||||
| Tax shield on existing asset book value | =Book value * tax rate | 87500 | |||||
| Cost of new machine | -1000000 | ||||||
| =a. Initial Investment outlay | -762500 | ||||||
| Profits | 250000 | 250000 | 250000 | 250000 | 250000 | ||
| -Depreciation | Cost of equipment/no. of years | -200000 | -200000 | -200000 | -200000 | -200000 | |
| =Pretax cash flows | 50000 | 50000 | 50000 | 50000 | 50000 | ||
| -taxes | =(Pretax cash flows)*(1-tax) | 37500 | 37500 | 37500 | 37500 | 37500 | |
| +Depreciation | 200000 | 200000 | 200000 | 200000 | 200000 | ||
| =b. after tax operating cash flow | 237500 | 237500 | 237500 | 237500 | 237500 | ||
| +Proceeds from sale of equipment after tax | =selling price* ( 1 -tax rate) | 75000 | |||||
| +Tax shield on salvage book value | =Salvage value * tax rate | 0 | |||||
| =c. Terminal year after tax cash flows | 75000 | ||||||
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