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TA, Inc. is considering replacing a piece of old equipment with a piece of new equipment....

TA, Inc. is considering replacing a piece of old equipment with a piece of new equipment. Details for both are given below:

Old Equipment New Equipment
Current book value $1,500,000
Current market value $2,500,000 Acquisition cost $6,200,000
Remaining life 10 years Life 10 years
Annual sales $350,000 Annual sales $850,000
Cash operating expenses $140,000 Cash operating expenses $500,000
Annual depreciation $150,000 Annual depreciation $620,000
Accounting salvage value $0 Accounting salvage value $0
Expected salvage value after 10 years $240,000 Expected salvage value after 10 years $750,000
  • The new equipment will require an additional investment of $250,000 in working capital.
  • The tax rate is 35%.

TA’s terminal year incremental after-tax non-operating cash flow is closest to:

(A.) $245,000

(B.) $331,500

(C.) $581,500

(D.) $737,500

(E.) $941,500

Solutions

Expert Solution

The amount is computed as shown below:

= (Salvage value of new equipment - Salvage value of old equipment) x (1 - tax rate) + Additional investment in net working capital

= ($ 750,000 - $ 240,000) x (1 - 0.35) + $ 250,000

= $ 331,500 + $ 250,000

= $ 581,500

So, the correct answer is option C.

jeff jeffy answered 2 years ago
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