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Material Type: Notes; Professor: Besley; Class: Principles of Finance; Subject: Finance; University: University of South Florida; Term: Unknown 1989;
Typology: Study notes
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New printer purchase price (130,000) Shipping ( 8,000) Installation ( 3,000) Sale of old printer 18, Tax on sale of old printer 8,820* Initial investment outlay (114,180)
Book value of old asset = 90,000 - 90,000(0.20 + 0.32) = 43,200 (The asset is two years old and being depreciated using MACRS 10-year life rates.)
Gain on the sale of the old asset = $18,000 - $43,200 = $(25,200) Tax on the gain = $(25,200)(0.35) = $(8,820) This is a negative tax, which is a tax “refund.”
Incremental Operating Cash Flows:
Δ in sales 40,000 40,000 40,000 40,000 40, Δ in depreciation** (11,100) (34,320) (16,890) (11,520) (15,510) Δ in taxable income 28,900 5,680 23,110 28,480 24, Δ in taxes (10,115) (1,988) (8,089) (9,968) (8,572)
Incremental operating CF = Δ in sales + Δ in taxes 29,885 38,012 31,912 30,032 43,
** Δ Depreciation 1 2 3 4 5 New printera^ (28,200) (45,120) (26,790) (16,920) (15,510) Old printerb^ (17,100) (10,800) ( 9,900) ( 5,400) 0 11,100 34,320 16,890 11,520 15,
a (^) New printer depreciation = $141,000(% depreciated). The % depreciated each year is 0.20, 0.32, 0.19,
0.12, and 0.11 for Years 1-5, respectively.
b (^) Old printer depreciation = $90,000(% depreciated). The % depreciated each year is 0.19, 0.12, 0.11,
0.06, and 0.0, respectively. Remember that the old printer is two years old; so the depreciation rates for Years 3-7 are used here.
Terminal Cash Flow:
Salvage of new printer 20, Tax on sale of new printerd^ (4,039) Salvage of old printer (a CF not received if the new printer is purchased) (6,000) Tax on sale of old printer (a CF not paid if the new printer is purchased)e^ 2, 12,
d (^) Book value of new printer at the end of five years = $141,000(0.06) = 8,
Gain on the sale of the new printer = 20,000 – 8,460 = 11, Tax on gain = 11,540(0.35) = 4,
e (^) Book value of old printer at the end of five years if it still exists = 0 (the printer will be fully depreciated)
Gain on the sale of the old printer if still exists = 6,000 – 0 = 6,000 (this is the amount the firm will lose receive if it replaces the old printer) Tax on gain = 6,000(.035) = 2,100 (this amount will not have to be paid if the firm replaces the old printer)