In: Finance
1. (Identifying cash flows) An analyst has prepared the following data as part of a proposal to acquire a new machine:
cost to purchase machine $40,000
cost to install machine 1,000
cost of new electric wiring 2,000
first year depreciation of machine 4,000
sales tax on purchasing machine 3,000
economic salvage value of the machine 10,000
accounting salvage value of the machine 8,000
a. Which of the above figures should enter the capital budgeting analysis?
b. What figure should enter the capital budgeting analysis as the investment at year zero?
c. Which of the above figures should not enter the capital budgeting analysis?
d. Will any of the items you list in part c have a later impact on the firm’s cash flows? If so, what?
ANS: Currency in $
(a) The following figures are used in capital budgeting analysis are :-
(b) Figures used in Capital Budgeting analysis as the investment at year 0 are-
Since the above cost are to be capitalised & are incurred at year 0.
(c) Figures not used in Capital Budgeting analysis are -
(d) Yes, Item mentioned in part (c) may have later impact on firm's cash flow.
Reasons -
Economic salvage value is the estimated resale value of the assets at the end of its useful life. Whereas Accounting Salvage value is the estimated book value of the assets after depreciation is complete. If a company sells an assets with a salvage value higher than its book value then the company has to pay taxes on account of future profit.