Question

A m/c was bought 4 years ago for $20,000. SL depreciation has been used with B=$20,000,...

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.

Homework Answers

Answer #1

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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