Question

Question Completion Status QUESTION 1 Chartwells Dining Services is considering an upgrade to their commercial cooking and refrigeration of the current equipment or any tax savings or losses that will occur as a result of that sale The current equipment was purchased 2 years ago at a cost of $317,800 and is being depreciated using an accelerated depreciation melthod. The book valun of the current equipment s the cost, less the accumulated depreciation from the last 2 years. f new equomentis purchased, t will be depreciated using the same accelesrated deprecation method (table equpment. The new epupment weould cost $600,00, before consdering the sae below). In addition, purchasing the new equipment will allow Chartwells to sell the current equipment for $12,700, the current market value Finally, new equipment will result in annual cost savings for the next 5 years in varying amounts (listed below) Cartwels has a tax rate of 33% and requires a return on investment of 8% for all capital expenditures Incremental Cash Flow (Cash Savings) Depreciation Year 1 :21% Year 2-332 Year 3 = 202% Year 4 : 125% Year 5 13 1% What is the net present value of replacing this asset? $41,000 $41,000 $20,000 $18,000 QUESTION 2 Based on your other question - type your answer to the following questions 1) What is the difference in depreciation for each year? (15 Points) 2) What is the tax savings as a result of the difference in depreciation for each year7 (15 Points) 3) What is the Net Cash Flow benefit from the incremental cash flows for each year (S Points) 4) What is the Present Value of the total savings for each year? (15 Points) 5) What is the initial Investment? (20 Points 6) What is the tax savings/loss that will be realized from the sale of the current equipmentz (10 Points) Click Sans und Submit toause and ณ1mir. Click Saue An Auvers to one an anneers.

Answer 1

	Data Available
1	New Equip cost	500,000
2	Old Equip
	Cost	317,800
	Life	2 yrs complete
	Sale price	12,700
3	Tax rate	33%
4	Return on investment	8%	on all capex

	Please note that the following tables and two notes will help solve all the sub-questions
	NPV of replacing the asset
Year	Description of cash flow	Inflow / Outflow (gross)	Inflow / Outflow (net of tax)	Discounting Factor	Present value
0	Cost of new equipment (Initial Investment)	(500,000)	(500,000)	1	(500,000)
0	Residual Value of old equipment	12,700	8,509	1	8,509
1 to 5	Tax savings on Depreciation ( See Note 1)	500,000	165,000		135,378
1 to 5	Incremental cash savings from new equipment (See Note 2)	135,000	90,450		75,328
				NPV	(280,785)

Note 1	Calculation of depriciation tax savings
	Year	Rate of depriciation	Book value	Depriciation for the year	Accumulated depriciation	Tax Inflow on depriciation	DF @ 8%	Present Value
	Year 1	21%	500,000	105,000	105,000	34,650	0.925926	32,083
	Year 2	33.20%	395,000	166,000	271,000	54,780	0.857339	46,965
	Year 3	20.20%	229,000	101,000	372,000	33,330	0.793832	26,458
	Year 4	12.50%	128,000	62,500	434,500	20,625	0.73503	15,160
	Year 5	13.10%	65,500	65,500	500,000	21,615	0.680583	14,711
				500,000		165,000		135,378

Note 2	Incremental cash savings from new equipment
	Year	Cash Savings	Net Cash Savings (net of tax)	DF @ 8%	Present Value
	1	41,000	27,470	0.925925926	25,435
	2	41,000	27,470	0.85733882	23,551
	3	20,000	13,400	0.793832241	10,637
	4	18,000	12,060	0.735029853	8,864
	5	15,000	10,050	0.680583197	6,840
		135,000	90,450		75,328