Chapter 8 Long Term Investment Decisions
Finding the Initial Investment
Given financial data:
New Machine's purchase price
Additional installment cost
Cost of old machine
Age of old equipment (years) 3
MACRS 5 year recovery
Selling price of old machine (now)
Increase in net working capital
Income tax rate 40%
Step One: Determine the book value of old machine
Cost of Old Machine $ -
MACRS: 1st 3 years
20% $ -
32% $ -
19% $ -
Net Book Value $ -
Step Two: Realized Gain or Loss on Sale of Old Machine
Selling Price of Old Machine $ -
Book Value of Old Machine $ -
Realized Gain on Sale $ -
Tax rate 40%
Tax $ -
Step Three: Net Cash Outflow Required at Time Zero
Installed cost of proposed machine
Cost of proposed machine $ -
Plus: Installation costs $ -
Total installed cost-proposed $ -
(depreciable value)
Less: After-tax proceeds from the sale of present machine
Proceeds from sale of present machine $ -
Less: tax on sale of present machine $ -
Total after-tax proceeds-present 0.00
Plus: Change in net working capital 0.00
Initial investment $ -
Finding the Operating Cash Inflows
Table 8.6
Depreciation Expenses for Proposed and Present
Machines for Powell Corporation
Applicable MACRS depreciation Depreciation
Cost percentages (from Table 3.2) [(1)x(2)]
Year (1) (2) (3)
With proposed machine
1 20% $ -
2 32% 0
3 19% 0
4 12% 0
5 12% 0
6 5% 0
Totals 100% $ -
With present machine
1 12% (year-4 depreciation) $ -
2 12% (year-5 depreciation) 0
3 5% (year-6 depreciation) 0
4 Because the present machine is at the end of the third year of its cost recovery at 0
5 the time the analysis is preformed, it has only the final 3 years of depreciation 0
6 (as noted above) still applicable. 0
Totals $ -
d
Table 8.8
Calculation of Operating Cash Inflows for Powell Corporation's
Proposed and present Machines
Note: because the spreadsheet exercise provides EBDIT, simply enter those numbers.
Year 1 Year 2 Year 3 Year 4 Year 5
With Proposed machine
Earnings before depr. and int. and taxes
Depreciation 0 0 0 0 0
Earnings before interest and taxes $ - $ - $ - $ - $ -
Taxes (rate T=40%) 0 0 0 0 0
Net operating profit after taxes $ - $ - $ - $ - $ -
Depreciation 0 0 0 0 0
Operating cash inflows $ - $ - $ - $ - $ -
With present machine
Earnings before depr. and int. and taxes
Depreciation 0 0 0 0 0
Earnings before interest and taxes $ - $ - $ - $ - $ -
Taxes (rate T=40%) 0 0 0 0 0
Net operating profit after taxes $ - $ - $ - $ - $ -
Depreciation 0 0 0 0 0
Operating cash inflows $ - $ - $ - $ - $ -
Finding the Terminal Cash Flow
After-tax proceeds from sale of porposed machine
Proceeds from sale of proposed machine 0
Less: Tax on sale of proposed machine 0
Total after-tax proceeds - proposed $ -
Less: After-tax proceeds from sale of present machine
Proceeds from sale of present machine 0
Plus or minus: Tax on sale of present machine 0
Total after-tax proceeds - present $ -
Plus: Change in net working capital $ -
Terminal cash flow $ -
Proposed Machine:
Sale price (in five years)
Book Value (Table 8.6) 0
Gain on sale $ -
Tax Expense (T=40%) 0
After-Tax proceeds on proposed machine $ -
Present Machine:
Sale price (in five years)
Book Value (Table 8.6) 0
Gain on sale $ -
Tax expense (T=40%) -
After=tax proceeds on present machine $ -
Table 8.9
Incremental (Relevant) Cash
Inflows for Powell Corporation
Operating cash inflows
Incremental (relevant)
a a
Proposed machine Present machine [(1) - (2)]
Year (1) (2) (3)
1 $ - $ - $ -
2 0 0 0
3 0 0 0
4 0 0 0
5 0 0 0
a
From final row for respective machine in Table 8.8.