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

jeff jeffy answered 1 year ago

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