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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