Question

A machine 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 machine can be bought for $10,000 to replace the old one. 100% bonus depreciation will be used for the new machine with B=$10,000, N=2 years, S=$0. The new machine will be used for 2 years and then can be sold for $4,000. The new machine will save $6,000/yr in operation cost. The old machine 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. (Not done in excel)

Answer 1

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.