Question
In: Finance
Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital budgeting project....
Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital budgeting project. The proposed asset costs $50,000 and has installation costs of $3,000. The asset will be depreciated using the MACRS five year recovery schedule. The existing equipment was purchased three years ago which orginally cost $25,000, has been depreciated using MACRS 5-year period. The new equipment is expected to result in an incremental increases in revenue of $10,000 a year for five years and a decreases in operating expenses of $5,000 a year for five years. The firm has a 21 percent tax rate.
Find the Incremental depreciation for the replacement project in year 1.
a. $2,500
b. $7,600
c. $7,000
d. $7,900
Find the incremental operating cash flow for the replacement project in year 1.
a. $12,040
b. $13,446
c. $25,000
d. $5,846
Solutions
Expert Solution
| Answer 1 | |||||||||
| Calculation of Incremental depreciation for the replacement project in year 1. | |||||||||
| Depreciation on New Equipment in Year 1 | $10,600.00 | ||||||||
| Less : Depreciation on old equipment in 4th Year | $3,000.00 | ||||||||
| Incremental depreciation for the replacement project in year 1. | $7,600.00 | ||||||||
| The answer is Option b. | |||||||||
| Working | |||||||||
| Calculation of depreciation on new equipment | Calculation of depreciation on old equipment | ||||||||
| Year | Depreciable value | Depreciation Rates (5 year MACRS class) | Depreciation | Year | Depreciable value | Depreciation Rates (5 year MACRS class) | Depreciation | ||
| 1 | $53,000.00 | 20.00% | $10,600.00 | 1 | $25,000.00 | 20.00% | $5,000.00 | ||
| 2 | $53,000.00 | 32.00% | $16,960.00 | 2 | $25,000.00 | 32.00% | $8,000.00 | ||
| 3 | $53,000.00 | 19.00% | $10,070.00 | 3 | $25,000.00 | 19.00% | $4,750.00 | ||
| 4 | $53,000.00 | 12.00% | $6,360.00 | 4 | $25,000.00 | 12.00% | $3,000.00 | ||
| 5 | $53,000.00 | 12.00% | $6,360.00 | 5 | $25,000.00 | 12.00% | $3,000.00 | ||
| 6 | $53,000.00 | 5.00% | $2,650.00 | 6 | $25,000.00 | 5.00% | $1,250.00 | ||
| Answer 2 | |||||||||
| Calculation of incremental operating cash flow for the replacement project in year 1. | |||||||||
| Increase in revenue | $10,000.00 | ||||||||
| Tax @ 21% on increase in revenue | -$2,100.00 | ||||||||
| Decrease in operating expenses | $5,000.00 | ||||||||
| Tax @ 21% on decrease in operating expenses | -$1,050.00 | ||||||||
| Depreciation tax shield on incremental depreciation [$7600 x 21%] | $1,596.00 | ||||||||
| Incremental operating cash flow for the replacement project in year 1. | $13,446.00 | ||||||||
| The answer is Option b. | |||||||||
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