Question

Acme Inc. may replace an old machine with a new, more efficient model. The old machine was purchased 5 years ago for $70,000. It is being depreciated over 7 years to zero book value using the straight-line method. Its current book value is $20,000. Its current market value is $16,000. The new machine costs $120,000. It will be depreciated over 6 years to zero book value using the straight-line method. After its useful life of 10 years it is expected to have a scrap value of $15,000. The new machine will increase Earnings before Depreciation and Taxes by $25,000 per year for 10 years. The company's tax rate is 30% and the appropriate discount rate for this project is 10%.Compute the project Year 5 incremental after-tax cash flow.Important::
Enter your answer in whole dollars (e.g., $45,000 or 45000)
Do not include any decimal places (cents).

Answer 1

Time line		0	1
Proceeds from sale of existing asset	Selling price* ( 1 -tax rate)	11200
Tax shield on existing asset book value	Book value * tax rate	6000
Cost of new machine		-120000
Initial Investment outlay		-102800
Profits			25000
-Depreciation	Cost of equipment/no. of years		-20000
Pretax cash flows			5000
-taxes	=(Pretax cash flows)*(1-tax)		3500
+Depreciation			20000
After tax operating cash flow			23500.00