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	$1,800,000
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	$180,000	Annual depreciation	$620,000
Accounting salvage value	$0	Accounting salvage value	$0
Expected salvage value	$240,000	Expected salvage value	$750,000

- The new equipment will require an additional investment of $250,000 in working capital.

- The tax rate is 35%.

TA’s incremental annual after-tax operating cash flow resulting from the investment in the new equipment is closest to:

(A.) -$195,000

(B.) $82,500

(C.) $199,500

(D.) $245,000

(E.) $444,500

Answer 1

Incremental Annual Sales = Annual sales with new equipment - annual sales with current equipment

= $850,000 - $350,000 = $500,000

Incremental Cash Operating expenses = Cash operating expenses with new equipment - cash operating expenses with current equipment

= $500,000 - $140,000 = $360,000

Incremental annual depreciation = Annual Depreciation with new equipment - Annual Depreciation with current equipment

= $620,000 - $180,000 = $440,000