Question

The Olson Company plans to replace an old machine with a new one costing $85,000. The old machine originally cost $55,000 and has six years of its expected 11-year life remaining. It has been depreciated straight-line assuming zero salvage value and has a current market value of $22,000. Olson's effective tax rate is 32%. Calculate the initial outlay associated with selling the old machine and acquiring the new one.

$________

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A project that is expected to last six years will generate incremental profit and cash flow before taxes and depreciation of $23,000 per year. It requires the initial purchase of equipment costing $60,000, which will be depreciated over four years. The relevant tax rate is 33%. Calculate the project's cash flows. Enter your answers in thousands. For example, an answer of $1 thousand should be entered as 1, not 1,000. Round your intermediate calculations and final answer to the nearest thousand dollars. Use a minus sign to indicate negative cash flows or decreases in cash, if required.

Year	Cash Flow ($000)
0	$
1	$
2	$
3	$
4	$
5	$
6	$

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Harry and Flo Simone are planning to start a restaurant. Stoves, refrigerators, other kitchen equipment, and furniture are expected to cost $55,000, all of which will be depreciated straight-line over five years. Construction and other costs of getting started will be $25,000. The Simones expect the following revenue stream ($000):

Year	1	2	3	4	5	6	7
Sales	$60	$90	$140	$160	$180	$200	$200

Food costs are expected to be 35% of revenues, while other variable expenses are forecast at 25% of revenues. Fixed overhead will be $40,000 per year. All operating expenses will be paid in cash, revenues will be collected immediately, and inventory is negligible, so working capital need not be considered. Assume the combined state and federal tax rate is 26%. Do not assume a tax credit in loss years, and ignore tax loss carry forwards. (Taxes are simply zero when EBT is a loss.) Develop a cash flow forecast for the Simones' restaurant. Round your answers to two decimal places. Use a minus sign to indicate negative cash flows or decreases in cash, if required.

Year	Cash Flow ($000)
0	$
1	$
2	$
3	$
4	$
5	$
6	$
7	$

Answer 1

Answer to Question 1.

Old Machine:

Original Cost = $55,000
Useful Life = 11 years

Annual Depreciation = Original Cost / Useful Life
Annual Depreciation = $55,000 / 11
Annual Depreciation = $5,000

Book Value at the end of 5 years = $55,000 - 5 * $5,000
Book Value at the end of 5 years = $55,000 - $25,000
Book Value at the end of 5 years = $30,000

Salvage Value = $22,000

After-tax Salvage Value = Salvage Value - (Salvage Value - Book Value) * Tax Rate
After-tax Salvage Value = $22,000 - ($22,000 - $30,000) * 0.32
After-tax Salvage Value = $22,000 + $2,560
After-tax Salvage Value = $24,560

New Machine:

Original Cost = $85,000

Initial Outlay = - Original Cost of New Machine + After-tax Salvage Value of Old Machine
Initial Outlay = -$85,000 + $24,560
Initial Outlay = -$60,440