Rockyford Company must replace some machinery that has zero book value and a current market value of $2,800. One possibility is to invest in new machinery costing $50,000. This new machinery would produce estimated annual pretax cash operating savings of $20,000. Assume the new machine will have a useful life of four years and depreciation of $12,500 each year for book and tax purposes. It will have no salvage value at the end of four years. The investment in this new machinery would require an additional $4,000 investment of net working capital. (Assume that when the old machine was purchased the incremental net working capital required at the time was $0.) 
If Rockyford accepts this investment proposal, the disposal of the old machinery and the investment in the new one will occur on December 31 of this year. The cash flows from the investment will occur during the next four calendar years. 
Rockyford is subject to a 40% incometax rate for all ordinary income and capital gains and has a 9% weightedaverage aftertax cost of capital. All operating and tax cash flows are assumed to occur at yearend. (For Parts 2 and 3, use the relevant table from Appendix C–Table 1 or Table 2.) 
Required: 
1.  Determine the aftertax cash flow arising from disposing of the old machinery. 
2. 
Determine the present value of the aftertax cash flows for the next four years attributable to the cash operating savings. (Round your answer to the nearest whole dollar amount.) 
3.  Determine the present value of the tax shield effect of depreciation for year 1. (Round your answer to the nearest whole dollar amount.) 
4. 
Which one of the following is the proper treatment for the additional $4,000 of net working capital required in the current year? 


Solution 1:
After tax cash flow from disposing old machine = $2,800 (10.40) = $1,680
Solution 2:
Annual pretax operating cash savings = $20,000
Annual after tax operating cash savings = $20,000 (10.40) = $12,000
Present value of after tax cash flows attributable to cash operating savings = $12,000 * cumulative PV Factor at 9% for 4 periods
= $12,000 * 3.23972 = $38,877
Solution 3:
Depreciation for year 1 = $12,500
Tax shield on depreciation = $12,500 * 40% = $5,000
Present value of the tax shield effect of depreciation for year 1 = $5,000 * PV factor at 9% for 1st period
= $5,000 * 0.917431 = $4,587
Solution 4:
Additional $4,000 of net working capital required in current year will be treated as part of the initial investment when determining the net present value.
Hence 3rd option is correct.
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