Question

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

Answer 1

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.