Question

Acompany is evaluating the addition of equipment to its presentoperations. They need to purchase equipment for...

Acompany is evaluating the addition of equipment to its presentoperations. They need to

purchase equipment for $160,000. The five year MACRS GDS Recovery Method is

appropriate forthe investment and the total tax rate (federal plus state) is 40%. Gross revenue

is expected to be $30,000/year while maintenance costs are expected to be $5,000/year. It is

expected that the operation will be shut down at the end of the fourth year with a salvage value

of $20,000.
1-Prepare a table showing your development of the ATCF's.

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Answer #1
Depreciation Schedule
Year Opening Balance Depreciation Base Depreciation % Depreciation Closing Balance
A B C D E = C*D F = B-E
1 160000 160000 20.00% 32000 128000
2 128000 160000 32.00% 51200 76800
3 76800 160000 19.20% 30720 46080
4 46080 160000 11.52% 18432 27648
Calculation of ATCF
Particulars 0 1 2 3 4
Initial Investment
Equipment Price (A) -160000
Operating Cash Flows
Gross Revenue (B) 30000 30000 30000 30000
Maintenance Costs (C ) 5000 5000 5000 5000
Depreciation (D) 32000 51200 30720 18432
Profit Before Tax (E = B-C-D) -7000 -26200 -5720 6568
Tax @40% (F = E*40%) -2800 -10480 -2288 2627.2
Profit After Tax (G = E-F) -4200 -15720 -3432 3940.8
Add back Depreciation (H = D) 32000 51200 30720 18432
Net Operating Cash Flows (I = G+H) 27800 35480 27288 22372.8
Terminal Value
Salvage Value (J) 20000
Book Value (K) 27648
Profit on sale (L = J-K) -7648
Tax @40% (M = L*40%) -3059.2
Profit After tax on sale (N = L-M) -4588.8
Add back Book Value (O = K) 27648
Net Terminal Value (P = N+O) 23059.2
Total After Tax Cash Flows (Q = A+I+P) -160000 27800 35480 27288 45432
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