A m/c was bought 4 years ago for $20,000. SL depreciation has been used with B=$20,000, N=5years, S=$0. A replacement is been considered. A new m/c can be bought for $10,000 to replace the old one. 100% bonus depreciation will be used for the new m/c with B=$10,000, N=2 years, S=$0. The new m/c will be used for 2 years and then can be sold for $4,000. The new m/c will save $6,000/yr in operation cost. The old m/c can be sold for $4,000 right now, or kept in used for 2 more years and then will be useless. Incremental combined tax rate is 50%, after-tax MARR is 10%. Calculate ∆PW of the replacement.
Answer:
Book value of the old machinery is $4,000.[20000-(4*20000/5)].
Purchase price of new machinery=$10,000.
With old machinery depreciation for current year=$4000 and tax benefit=$2000(50%*4000).
With new machinery, tax benefit for the current year=$5,000(50%*10,000)(using 100% bonus depreciation).
With new machinery saving in operating cost (considered as revenue while comparing with old machinery).
Revenue from new machinery after deducting tax =
Year | BTCF | Depreciation | Tax@50% | After Tax cash flow | PV of ATCF@10%MARR |
0 | -10000 | -10000 | |||
1 | 6000 | 10000 | 0 | 6000 | 5455 |
2 | 6000 | 0 | 3000 | 3000 | 2480 |
2 | 4000(sale proceeds) | 2000 | 2000 | 1653 | |
Total | -412 |
Change in present worth due to replacement=-$412.
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