Question
In: Finance
Please show work A person has bought a machine which costs $80,000 to buy and $20,000...
Please show work
A person has bought a machine which costs $80,000 to buy and $20,000 to install. The annual operating cost would be $3,000 for the first year and it is expected to increase by $700 thereafter. This machine will save $20,000 for each year and the life of the machine is 5 years.
If the person decides to sell this machine at the end of second year for $80,000. Construct the income statement and cash flow statement by using marginal tax rate at 38%
Solutions
Expert Solution
| Income statement | ||||
| Year | 1 | 2 | ||
| Savings in cost | $20,000.00 | $20,000.00 | ||
| Less : Operating cost | $3,000.00 | $3,700.00 | ||
| Less : Depreciation | $20,000.00 | $20,000.00 | ||
| Earnings before tax | -$3,000.00 | -$3,700.00 | ||
| Less : Tax @ 38% | -$1,140.00 | -$1,406.00 | ||
| Net Income | -$1,860.00 | -$2,294.00 | ||
| Cash flow statement | ||||
| Year | 0 | 1 | 2 | |
| Installed cost of machine | -$100,000.00 | |||
| Net Income | -$1,860.00 | -$2,294.00 | ||
| Depreciation | $20,000.00 | $20,000.00 | ||
| After tax Salvage value | $72,400.00 | |||
| Cash flows | -$100,000.00 | $18,140.00 | $90,106.00 | |
| Calculation of after tax salvage value | ||||
| Sale value | $80,000.00 | |||
| Less : Book value of machine at the end of 2nd year [$100000 - $40000] | $60,000.00 | |||
| Gain on sale | $20,000.00 | |||
| Tax on gain @ 38% | $7,600.00 | |||
| After tax salvage value [Sale value - Tax] | $72,400.00 | |||
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